Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2004 Commission File Number 33-94322
WINFIELD CAPITAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2704241
--------------------------------- -------------------
(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
237 Mamaroneck Avenue, White Plains, New York 10605
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 949-2600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
--------------------------------------
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of June 18, 2004 was approximately $2,859,395. The number
of outstanding shares of the Registrant's common stock as of June 18, 2004 was
5,346,084 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be filed not
later than 120 days after March 31, 2004, are incorporated into Part III of this
Report.
================================================================================
RISKS
Pursuant to Section 64(b) of the Investment Company Act of 1940, we are
required to advise you annually that Winfield Capital Corp. (the "Company") is
engaged in a high risk business. Loans to and other investments in small
business concerns are extremely speculative. Most of such concerns are privately
held. Even if a public market for the securities of such concerns exists, the
loans and other securities purchased by the Company are often restricted from
sale or other transfer for specified and significant periods of time. Thus, such
loans and other investments have little, if any, liquidity, and the Company and
you, as its shareholders, must bear significantly larger risks, including
possible losses on such investments, than otherwise would be the case with
traditional investment companies.
According to the U.S. Small Business Administration (the "SBA")
Regulations, the Company is required to be in compliance with the capital
impairment rules, as defined by regulation 107.1830 of the SBA Regulations. The
Company was notified by the SBA on April 30, 2003 that the Company was no longer
in compliance with the SBA's capital impairment requirements and that the SBA
had accelerated the maturity date of the Company's debentures. The aggregate
principal, interest and fees due under the debentures totaled approximately
$25.6 million as of April 30, 2003, including interest and fees due through the
next semi-annual payment date. As a result of subsequent repayments by the
Company, the aggregate principal, interest and fees due under the debentures
totaled approximately $21.1 million as of March 31, 2004, including interest and
fees due through the next semi-annual payment date. The SBA has transferred
Winfield Capital's account to liquidation status where any new investments and
material expenses are subject to prior SBA approval. Based on discussions and
meetings that the Company has had with the SBA to date, the SBA will not afford
the Company the flexibility of a self-managed liquidation to repay its
indebtedness. As a result, the Company anticipates that it will be required to
repay all or substantially all of the principal and interest owing to the SBA on
a schedule acceptable to the SBA. No definitive agreement has been reached with
the SBA and the SBA maintains the ability to pursue any remedies they deem
appropriate under the law or the instruments evidencing the Company's
indebtedness, including, without limitation, initiating proceedings for the
appointment of the SBA or its designee as receiver. If the SBA were to require
the Company to immediately pay back the entire indebtedness including accrued
interest, certain private security investments may need to be disposed of in a
forced sale which may result in proceeds less than their carrying value at March
31, 2004. As such, this impairment could have a material adverse effect on the
Company's financial position, results of operations and cash flows which raises
substantial doubt about the Company's ability to continue as a going concern.
The Company continues to explore various strategic alternatives, including a
third party equity infusion, although there can be no assurance that it will be
successful in its ability to consummate or implement these or any other
strategic alternatives.
In addition, inasmuch as the Company's capital structure includes a
large amount of debt securities, all of which are debentures issued to the SBA
at fixed interest rates, unless and until the Company is able to invest all or
substantially all of the proceeds from such debt securities at annualized
interest or at other rates of return that substantially exceed annualized rates
of interest the Company is required to pay the SBA under these debentures, the
Company's operating results will be adversely affected which, in turn, may
depress the market value of the Company's shares of common stock.
PART I
Item 1. Business
Winfield Capital Corp. (the "Registrant" or the "Company") was
incorporated as a New York corporation in 1972. It is a small business
investment company ("SBIC") that was licensed by the U.S. Small Business
Administration (the "SBA") in 1972 under the Small Business Investment Act of
1958, as amended (the "Small Business Investment Act"). The Company is a
non-diversified investment company that has elected to be regulated as a
Business Development Company ("BDC"), a type of closed-end investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Company has elected to be taxed as a Regulated Investment Company
("RIC") for Federal income tax purposes. The Company's offices are located at
237 Mamaroneck Avenue, White Plains, New York 10605 and its telephone number is
(914) 949-2600. The Company can also be reached via its Web site at
http://www.winfieldcapital.com.
As a SBIC, the Company uses funds borrowed from the SBA, together with
its own capital, to provide loans to, and to make equity investments in,
unaffiliated business concerns that (i) do not have a net worth in excess of $18
million and do not have average net income after Federal income taxes for the
two years preceding any date of determination of more than $6 million, or (ii)
meet size standards set by the SBA that are measured by either annual receipts
or number of employees, depending on the industry in which such concerns are
primarily engaged ("Eligible Concerns"). The types and dollar amounts of the
loans and other investments the Company may make are limited by the 1940 Act,
the Small Business Investment Act and the regulations of the SBA (the "SBA
Regulations"). The SBA is authorized to examine the operations of the Company
and the Company's ability to obtain funds from the SBA is also governed by the
Small Business Investment Act and the SBA Regulations. As a BDC, the Company is
required to make available significant managerial assistance to its portfolio
companies.
The Company has no independent investment adviser. The Company's loan
and other investment decisions are made by its officers, in accordance with the
Company's established investment policies and objectives, subject to oversight
by its Board of Directors. Historically, the Company has relied on its officers
to identify new financing opportunities. Following its initial public offering
("IPO") late in 1995, the Company expanded its marketing efforts and sought
transaction referrals from venture capitalists, investment bankers, attorneys,
accountants and commercial bankers. The Company has sought to enter into either
straight loan or equity transactions with portfolio companies or debt
transactions having equity components ("debt securities"). In connection with
the latter, the Company has sought and will continue to seek security interests
in and liens on the assets of the borrower. To the extent it deems necessary,
the Company also seeks to obtain personal guaranties from the principals of its
borrowers and security interests in certain of the assets of such principals.
Selected Recent Developments
- ----------------------------
On June 17, 2002, the Company received notice from the Nasdaq Stock
Market, Inc. ("Nasdaq") that for the preceding 30 consecutive trading days, the
Company's common stock had not maintained the minimum Market Value of Publicly
Held Shares of $5,000,000 as required for continued inclusion by Marketplace
Rule 4450(a)(2) on the Nasdaq National Market. On July 23, 2002, the Company
received notice from Nasdaq that for the preceding 10 consecutive trading days,
the Company's common stock had not closed at the minimum $1.00 per share as
required for continued inclusion by Marketplace Rule 4450(a)(5) (the "Minimum
Bid Price Rule") on the Nasdaq National Market. As a result of these notices,
the Company made an application to the Staff of the Nasdaq Listing
Qualifications Department (the "Staff") to transfer the Company's common stock
from the Nasdaq National Market to the Nasdaq SmallCap Market. On September 25,
2002, the Company was notified by the Staff that its application to transfer the
listing was approved provided it met the Minimum Bid Price Rule by January 22,
2003 (the "Grace Period") and trading in the Company's common stock on the
Nasdaq SmallCap Market commenced on September 26, 2002. On January 22, 2003, the
Company received a determination of the Staff indicating that the Company still
failed to comply with the Minimum Bid Price by the end of the Grace Period and
was therefore, subject to delisting. As the delisting determination was based on
a quantitative deficiency, the Company's common stock was deemed eligible for
quotation on the Over the Counter Bulletin Board ("OTCBB"). On April 15, 2003,
the Company's common stock commenced trading on the OTCBB under the symbol
"WCAP".
According to the U.S. Small Business Administration (the "SBA")
Regulations, the Company is required to be in compliance with the capital
impairment rules, as defined by regulation 107.1830 of the SBA Regulations. The
Company was notified by the SBA on April 30, 2003 that the Company was no longer
in compliance with the SBA's capital impairment requirements and that the SBA
1
had accelerated the maturity date of the Company's debentures. The aggregate
principal, interest and fees due under the debentures totaled approximately
$25.6 million as of April 30, 2003, including interest and fees due through the
next semi-annual payment date. As a result of subsequent repayments by the
Company, the aggregate principal, interest and fees due under the debentures
totaled approximately $21.1 million as of March 31, 2004, including interest and
fees due through the next semi-annual payment date. The SBA has transferred
Winfield Capital's account to liquidation status where any new investments and
material expenses are subject to prior SBA approval. Based on discussions and
meetings that the Company has had with the SBA to date, the SBA will not afford
the Company the flexibility of a self-managed liquidation to repay its
indebtedness. As a result, the Company anticipates that it will be required to
repay all or substantially all of the principal and interest owing to the SBA on
a schedule acceptable to the SBA. No definitive agreement has been reached with
the SBA and the SBA maintains the ability to pursue any remedies they deem
appropriate under the law or the instruments evidencing the Company's
indebtedness, including, without limitation, initiating proceedings for the
appointment of the SBA or its designee as receiver. If the SBA were to require
the Company to immediately pay back the entire indebtedness including accrued
interest, certain private security investments may need to be disposed of in a
forced sale which may result in proceeds less than their carrying value at March
31, 2004. As such, this impairment could have a material adverse effect on the
Company's financial position, results of operations and cash flows which raises
substantial doubt about the Company's ability to continue as a going concern.
The Company continues to explore various strategic alternatives, including a
third party equity infusion, although there can be no assurance that it will be
successful in its ability to consummate or implement these or any other
strategic alternatives
Characteristics of the Company's Investments
- --------------------------------------------
The Company invests in all kinds and classes of securities issued by
portfolio companies, including, but not limited to, notes and bonds; straight,
senior, subordinated, convertible and interest-paying debentures; preferred
stock; common stock; and options and warrants to purchase the foregoing. The
Company does not have a policy that limits the amount that it may invest in any
kind or class of security, except that it intends to primarily invest its assets
in straight loans or debt securities.
When the Company's investments are structured as loans, they typically
are evidenced by promissory notes or equivalent instruments with a specified
maturity or due upon demand, and often are accompanied by warrants to acquire
equity interests in the borrower for nominal consideration. The loans are
usually collateralized by assets of the borrower, which security interests
frequently are senior to any other secured debt financing the borrower may have
in place. When appropriate, a personal guaranty of a borrower's major
stockholder or stockholders is sought, which may also be collateralized by such
stockholders' personal assets. The Company's loans typically have a fixed rate
of interest subject to the maximum rate allowed by the SBA (see "SBA Regulation"
below), although lower rates may be negotiated depending on the creditworthiness
of the borrowers and other relevant factors. Typically (although there may be
exceptions), such loans require periodic payments of principal and interest that
fully amortize the loan at maturity, and mature in five years or less. In
addition, the Company intends to pursue "bridge loan" opportunities (e.g.,
typically with maturity dates not more than one year) as and to the extent
permitted by the SBA Regulations. Management believes that, although there can
be no assurance, the performance of its investment portfolio could be enhanced
by increasing the Company's equity investments, relative to its loan portfolio.
Accordingly, the Company's management intends to continue seeking more financing
opportunities with equity participation and more investments with equity
components than previously were sought by the Company. There can be no assurance
that the Company will find such opportunities on terms favorable to the Company,
if at all.
Investments that the Company holds in its portfolio companies may be
"restricted securities," as that term is defined under Rule 144 of the
Securities Act of 1933, as amended (the "1933 Act"). These securities may not be
sold freely in the absence of registration under the 1933 Act. As a result, its
ability to sell or otherwise transfer the securities it holds in its portfolio
will be limited. The capital stock it receives from portfolio companies is
expected to be acquired primarily in private transactions negotiated directly
with the portfolio company or an affiliate. The Company's management will
continue to be principally responsible for conducting negotiations with respect
to its investments in portfolio companies. The Company may acquire securities of
public companies in connection with mergers of its portfolio companies with such
public companies. The Company may invest a portion of its other assets in the
publicly traded securities of public companies. Such investments, and other
investments that are not "qualifying assets," may not exceed 30% of the value of
the Company's total assets at the time of any such investment.
2
Investment Objectives and Strategies
- ------------------------------------
The Company seeks both current income and long-term growth in the value
of its assets. The Company's investments are made, and are intended to continue
to be made, with the intention of having any loan repaid within five years and
any equity investment liquidated within 5 to 10 years. Situations may arise,
however, where the Company may hold an equity interest for a longer or shorter
period of time.
Prior to May 2, 1995, when there was a change in management of the
Company, the Company's investments were made primarily in very small local
retail and service businesses. Today, the Company focuses on investments in
privately held "Eligible Concerns" in industries that management considers
growing industries, including, but not limited to technology and other "new
economy" businesses, computer hardware/software, and consumer products
manufacturers and distributors. There can be no assurance that the Company will
continue to be able to locate investments in such businesses on favorable terms.
If the Company is unable to identify such investments, it would seek to
reevaluate its overall investment strategies. Although the Company is
headquartered and incorporated in the Northeast, it considers investments
throughout the country provided they are otherwise consistent with the Company's
loan and other investment selection criteria.
Generally, the Company's existing portfolio companies are expansion
stage businesses, although some are start-up and development stage companies,
including some with negative net worth and net operating losses. Under
applicable SBA Regulations, the Company may not invest more than 20% of its
"Private Capital" in any single company without prior SBA approval. Under the
Small Business Investment Act and the SBA Regulations, "Private Capital" is
defined as the total of paid-in capital, other than capital obtained from
Federal sources (such as the SBA), and paid-in surplus. In most instances, the
Company participates in loans and other investments with other investors.
Accordingly, the Company has been able to become involved in transactions larger
than would otherwise be possible under the investment limit of 20% of its own
Private Capital.
Selection of Loan and Other Investment Opportunities
- ----------------------------------------------------
Given the Company's objective to emphasize equity investments, the
Company uses the following criteria in selecting investment opportunities:
Potentially Profitable Operations. The Company attempts to
identify companies that are profitable or that it believes will
become profitable in the future.
Development Stage Companies. The Company attempts to identify
and invest in development stage companies, (i.e., companies with a
product or service that is beyond the testing stage). The Company
generally seeks to avoid so-called "seed capital" and start-up
companies.
Experienced Management Team. The Company seeks to invest in
portfolio companies that have experienced management with a
substantial ownership interest and a demonstrated ability, or the
potential, to accomplish the objectives set forth in such companies'
business plan.
Liquidation Value of Assets. Although the Company is not an
"asset-based" lender, the value of assets securing its loans is an
important consideration in its loan decisions. Emphasis is placed on
balance sheet assets such as inventory, plant, property and
equipment.
Growth. The Company requires that prospective borrowers have
sufficient cash flow to service their debt along with having in
management's determination a good chance of achieving substantial
annual growth.
Exit Strategy. Another investment consideration is whether
there is an opportunity to liquidate the investment in a potential
portfolio company in the future. Such opportunity generally would
allow the Company to realize a gain on its equity interests that have
appreciated in value, if at all, through public offerings, sales of
the portfolio company, mergers with other companies or repurchases by
the portfolio company of the Company's equity interests. In this
connection, the Company often seeks to obtain registration rights
("demand" and "piggyback") as a condition to its equity investments.
The foregoing criteria are general guidelines rather than fixed
requirements and the Company may consider such other criteria as investment
opportunities arise.
3
Certain Non-Compliance by Portfolio Companies
- ---------------------------------------------
Although the Company's agreements with its portfolio companies require
them to furnish the Company with periodic and/or annual financial statements and
to include financial and other covenants by its borrowers in its loan
agreements, certain of its portfolio companies may fail to supply the financial
statements or to otherwise comply with the covenants required of them. The
Company deals with these failures on a case-by-case basis, and the exercise by
the Company of appropriate remedies are often influenced by the payment records
of such companies.
The aggregate face amount of the Company's outstanding loans and the
value of other portfolio investments was $31,216,170 as of March 31, 2004 with
loans and notes receivable comprising approximately 34% (80% of which were
performing in accordance with their terms and 20% were non-performing) and
equity interests approximately 66%.
There was unrealized appreciation on loans and investments of
$1,262,680 for the year ended March 31, 2004 (principally reflecting the
increased market price of investments in four publicly traded portfolio
companies and the increased fair value of an investment in one privately held
portfolio company partially offset by the decreased fair value of investments in
two privately held portfolio companies). There was unrealized depreciation on
loans and investments of $2,654,690 for the year ended March 31, 2003
(principally reflecting the decreased market price of investments in nine
publicly traded portfolio companies partially offset by the increased market
price of one publicly traded portfolio company investment and the decreased fair
value of investments in five privately held portfolio companies partially offset
by the increased fair value of investments in five privately held portfolio
companies).
Write-Offs
- ----------
During the past three fiscal years, the Company has written-off loans
and investments and disposed of, at a loss, assets acquired in liquidation in
the aggregate amount of $2,532,638 as described in the following table:
Year Ended March 31,
--------------------------------------------
2002 2003 2004
---------- ---------- ----------
Amount written-off.................................................. $2,337,716 $ 182,001 $ 12,921
Amount written-off as a percentage of loans and
investments and assets acquired in liquidation as of the
beginning of the year............................................ 7.73% 1.29% 0.07%
SBA Funding
- -----------
The Small Business Investment Act and the regulations thereunder
provide for the purchase by the SBA of subordinated debentures issued by SBICs
and the guaranty by the SBA of debentures issued by SBICs to third parties. A
SBIC can issue such debentures in a principal amount up to either 200% or 300%
of its Private Capital, depending upon various factors.
The Company has, as approved by the SBA as of March 31, 2004, Private
Capital of approximately $27,000,000, which would enable it to sell debentures
to, or with a guaranty by, the SBA up to a maximum principal amount of
approximately $81,000,000 (300% of its Private Capital). The Company's ability
to sell such debentures is subject to the availability of SBA program funds and
other funding limitations and compliance with the SBA Regulations. See "SBA
Regulation" below.
The SBA offers eligible SBICs the opportunity to sell "participating
securities" (i.e., either preferred stock or debentures having interest payable
only to the extent of earnings) to the SBA or to entities that receive SBA
guaranties in an amount up to 200% of the SBIC's Private Capital. Although the
Company has the minimum amount of Private Capital necessary to be eligible for
the SBA's participating securities program (i.e., $10,000,000), the issuance of
any future Company debentures may disqualify the Company from participating in
the program under the provisions of the SBA Regulations and the 1940 Act. In
addition, the Company believes that, to date, only partnerships have been
allowed to issue participating securities and that corporations may not be
allowed to issue participating securities.
4
SBA Regulation
- --------------
SBICs, such as the Company, are licensed by the SBA as part of a
program designed to stimulate the flow of private debt and/or equity capital to
"Eligible Concerns" and "Smaller Concerns." Under current SBA Regulations and
the Small Business Investment Act, an independently owned and operated business
concern that does not have a net worth in excess of $18 million and does not
have average net income after Federal income taxes for the preceding two years
of more than $6 million, or meets size standards prescribed by the SBA relating
either to annual receipts or number of employees, depending on the industry in
which such business primarily operates, is eligible to receive financial
assistance from a SBIC (hereinafter referred to as an "Eligible Concern"). The
SBA Regulations also define a "Smaller Concern" as a concern with a net worth of
$6 million or less and average annual net profits after taxes of $2 million or
less, or depending on the industry in which the business operates, meets
criteria based on the number of its employees or its annual receipts. Commencing
with its fiscal year ended March 31, 1996, the Company was required by the SBA
Regulations to earmark at least 10% of its financing to Smaller Concerns and in
each subsequent fiscal year to earmark at least 20% of its financing to Smaller
Concerns.
SBA Regulations place certain limitations on the terms of loans made by
SBICs. The maximum maturity of these loans may not exceed 20 years. A borrower
from a SBIC cannot be required during the first five years to repay, on a
cumulative basis, more principal than an amount calculated on a straight-line,
five-year amortization schedule. On straight loans (without equity components) a
SBIC can charge an interest rate of up to 19% and on loans with equity
components an annualized interest rate of up to 14%. Notwithstanding the above
restrictions, a SBIC can charge a borrower more by first computing a base rate
using either the SBA debenture rate currently in effect, plus an applicable
charge permitted by the SBA, or a base rate using the weighted average cost of
the SBIC's borrowings from the SBA and qualified third party lenders such as
banks. On loans with equity components, a SBIC may charge interest equal to 6%
above the base rate used and, in the case of a straight loan, 11% above the base
rate used.
SBICs may invest directly in the equity of their portfolio companies.
However, they may not become a general partner of a non-incorporated entity or
otherwise become jointly or severally liable for the general obligations of a
non-incorporated entity. A SBIC may acquire options or warrants in its portfolio
companies. Such options and warrants may also have redemption provisions,
subject to certain restrictions. As a result of a recent change in the SBA
Regulations, SBICs are now permitted to control a portfolio company. "Control"
for this purpose is defined as the ownership (or control) of a 50% interest in
the outstanding voting securities of a portfolio company if it is held by fewer
than 50 shareholders, or if there are 50 or more shareholders, a 20% to 25%
interest (depending on the holdings of other shareholders of the portfolio
company).
With certain limited exceptions, SBICs may not invest overseas, in real
estate or in passive businesses, that is, businesses that are not regular and
continuous.
Regulation as a Business Development Company
- --------------------------------------------
The Company is a closed-end, non-diversified investment company that
has elected to be regulated as a BDC under the 1940 Act and, as such, is subject
to regulation under that Act. Among other things, the 1940 Act contains
prohibitions and restrictions relating to transactions between the Company and
its affiliates, principal underwriters and affiliates of those affiliates or
underwriters and requires that a majority of the Company's directors be persons
other than "interested persons," as defined in the 1940 Act. In addition, the
1940 Act prohibits the Company from changing the nature of its business so as to
cease to be, or to withdraw its election as, a BDC unless so authorized by the
vote of the holders of a majority of its outstanding voting securities.
A BDC is permitted, under specified conditions, to issue multiple
classes of indebtedness and one class of stock having rights as to voting,
liquidation and dividends which are senior to the Company's common stock
(collectively, "Senior Securities," as defined in the 1940 Act) if the asset
coverage, as defined in the 1940 Act, of any Senior Security is at least 200%
immediately after each such issuance and certain other conditions are met. On
the other hand, because the Company is a SBIC, the only asset coverage
requirement applicable to it that would give the holders of its Senior
Securities constituting indebtedness, including the Debentures, the right to
elect a majority of the Board of Directors, if on the last business day of each
of 12 consecutive calendar months, the Company failed to maintain at least 100%
asset coverage. Also, while Senior Securities constituting preferred stock are
outstanding (other than preferred stock issued to or guaranteed by the SBA),
provision must be made to prohibit any distributions to shareholders or the
repurchase of such securities or shares unless the applicable asset coverage
ratios are met at the time of the distribution or repurchase. The Company may
also borrow amounts from banks evidenced by notes not to be publicly distributed
5
or for temporary purposes if the borrowing does not exceed 5% of the value of
its total assets. A loan is presumed to be for temporary purposes if it is
repaid within sixty days and is not extended or renewed.
Under the 1940 Act, a BDC may not acquire any asset, other than
assets of the type listed in Section 55(a) of the 1940 Act ("Qualifying Assets")
unless, when the acquisition is made, such Qualifying Assets represent at least
70% of its total assets. The principal categories of Qualifying Assets relevant
to the business of the Company are the following:
(1) Securities purchased in transactions not involving any
public offering from the issuer of such securities, which
issuer is an eligible portfolio company. An "eligible
portfolio company" is defined, in pertinent part, in the
1940 Act as any issuer which:
(a) is organized under the laws of, and has its principal
place of business in, the United States;
(b) is not an investment company other than another SBIC
that is wholly owned by the Company; and
(c) does not have any class of securities with respect
to which margin credit may be extended by a member of
a national securities exchange, broker or dealer.
(2) Securities of any eligible portfolio company that is
controlled by the BDC.
(3) Securities received in exchange for or distributed on or
with respect to securities described in items (1) or (2)
above, or pursuant to the exercise of options, warrants or
rights relating to such securities.
(4) Cash, cash items, government securities, or high quality
debt securities maturing in one year or less from the time
of investment.
In addition, a BDC must have been organized (and have its principal
place of business) in the United States for the purpose of making investments in
the types of securities described in items (1) or (2) above and, in order to
count the securities as Qualifying Assets for the purpose of the 70% test, the
BDC must either control the issuer of the securities or make available to the
issuer of the securities significant managerial assistance. Making available
significant managerial assistance means, among other things, any arrangement
whereby a BDC, through its directors, officers or employees, offers to provide,
and, if accepted, does so provide, significant guidance and counsel concerning
the management, operations or business objectives and policies of a portfolio
company; or in the case of a SBIC (such as the Company), making loans to a
portfolio company.
Fundamental and Other Investment Policies
- -----------------------------------------
The Company's investment objectives are to achieve a high level of
current income from interest and long-term growth through equity interests in
its portfolio companies.
Fundamental Policies
- --------------------
In making investments and managing its portfolio, the Company will
adhere to the following fundamental policies, which may not be changed without
the approval of the holders of 50% or more of the Company's outstanding voting
securities, or the holders of 67% or more of the Company's outstanding voting
securities present at a meeting of security holders at which holders of 50% or
more of such securities are present in person or by proxy:
1. The Company will conduct its business so as to retain its
status as a SBIC and as a BDC, and to qualify as a "Regulated
Investment Company" (as defined under the Internal Revenue Code of
1986, as amended). In order to retain its status as a SBIC, the Company
must limit its investments to Eligible Concerns and meet the minimum
financing obligations applicable to Smaller Concerns (see "SBA
Regulation").
2. The Company will not borrow money except through the
issuance of its subordinated debentures, other debentures ranking on an
equal basis with its subordinated debentures, the SBA Debentures and
through one or more bank lines of credit.
6
3. The Company may issue preferred stock with such terms as
the Board of Directors may determine, subject to the requirements of
the 1940 Act and the Small Business Investment Act.
4. The Company will not (i) act as an underwriter of
securities (except to the extent it may be deemed to be an
"underwriter" as defined in the 1933 Act of securities purchased by it
in private transactions), (ii) purchase or sell real estate or
interests in real estate or real estate investment trusts (except that
the Company may acquire real estate which collateralizes its loans or
guaranties of its loans upon defaults of such loans and may dispose of
such real estate as and when market conditions permit), (iii) sell
securities short, (iv) purchase securities on margin (except to the
extent that the registrant may be deemed to have done so as a result of
its acquisition of securities in connection with loans made to
portfolio companies which are funded with borrowed money), or (v)
purchase or sell commodities or commodity contracts, including futures
contracts (except where necessary in working out distressed loans or
investments).
5. The Company may write or buy put or call options in
connection with loans to, and other investments in, portfolio
companies, or rights to require the issuer of such securities to
repurchase such loans and other investments under certain
circumstances.
6. The Company has no policy with respect to concentration of
investments in a particular company, industry or groups of industries,
except that it will not loan money to, or invest in, any company if
such loan or investment exceeds 20% of the Company's Private Capital,
without SBA approval.
7. The Company may make straight loans and loans with equity
components to the extent permitted under the Small Business Investment
Act and the 1940 Act.
Other Investment Policies
- -------------------------
The Company's investment policies described below are not fundamental
policies, and may be changed, subject to the Small Business Investment Act and
the SBA Regulations, by the Company's Board of Directors without shareholder
approval:
1. Except for subsidiaries organized by the Company to hold
assets acquired in foreclosures of defaulted loans, the Company will
not acquire (i) 50% or more of the outstanding voting securities of any
issuer held by fewer than 50 shareholders, (ii) 25% or more of the
outstanding voting securities of any issuer having 50 or more
shareholders, or (iii) 20% or more of the outstanding voting securities
of any issuer having 50 or more shareholders if, as a result of such
acquisition, the Company would hold a number of voting securities equal
to or greater than the largest other holding of such securities.
2. The Company will not invest in companies for the purpose of
controlling management of such companies.
3. The Company will not invest in finance companies, foreign
companies, passive businesses or real estate companies, except as
permitted by the SBA.
4. The Company has no policy with respect to portfolio
turnover. Moreover, because borrowers have certain prepayment rights
pursuant to SBA Regulations, the Company cannot control or predict the
frequency of portfolio turnover.
5. Pending the investment of its funds in Eligible Concerns
(including Smaller Concerns) or as otherwise permitted by the SBA, the
Company may invest its funds in direct obligations of, or obligations
guaranteed as to principal and interest by, the United States which
mature in 15 months or less, repurchase agreements with Federally
insured institutions with respect to such obligations which mature in
seven days or less, or certificates of deposit issued by a qualified
Federally insured institution which mature in one year or less, or will
be deposited in a qualified Federally insured institution in accounts
which may be subject to withdrawal restrictions not to exceed one year.
In order to retain its status as a BDC, the Company may not acquire
assets (other than non-investment assets necessary and appropriate to its
operations as a BDC) if, after giving effect to such acquisition, the value of
7
its Qualifying Assets is less than 70% of the value of its total assets. See
"Regulation as a BDC". In order to qualify as a RIC, the Company is required,
among other things, to diversify its holdings as required under the Internal
Revenue Code of 1986, as amended. The Company qualified as a RIC for the fiscal
year ended March 31, 2004.
Competition
- -----------
Many entities, including banks, lending companies (including other
SBICs), venture capital funds and other sources of capital, compete for loan
originations and investments similar to those made by the Company. The Company's
competition is not limited to entities that operate in the same geographical
area as the Company, as many of the Company's competitors operate throughout the
United States. Furthermore, competition for loan origination has increased as
the financial resources of the banking community have grown over the last few
years. Many of the Company's competitors have far greater financial and
personnel resources than the Company. In addition, many other SBICs use
professional investment advisors to seek and evaluate potential investments. The
Company does not have an independent investment advisor nor does it intend to
retain one.
Forward-Looking Statements
- --------------------------
This report and accompanying notes to the financial statements may
contain forward-looking statements. For this purpose, any statements contained
in this report and accompanying notes to the financial statements that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as "may," "will," "expect," "could,"
"would," "should," "believe," "anticipate," "estimate," "continue," "provided,"
or comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors.
Personnel
- ---------
As of June 18, 2004, the Company had two full-time employees (Messrs.
Paul A. Perlin, Chief Executive Officer and R. Scot Perlin, Chief Financial
Officer). In addition to its salaried employees, the Company has from time to
time engaged the services of independent consultants as and when needed. The
Company considers its relations with employees to be satisfactory.
Item 2. Properties
The Company operates its executive offices where it maintains its
investment and business records from rented quarters, consisting of
approximately 2,000 square feet, located in a four-story office building under a
lease expiring on February 29, 2008. The lease is cancelable at the Company's
option on 90 days prior written notice. Management considers that such quarters
will be adequate for the near term for the conduct of the Company's business.
Item 3. Legal Proceedings
From time to time in the ordinary course of business, the Company
initiates legal proceedings against borrowers in default and, where warranted,
their guarantors to seek payment of loan obligations and to take possession of
collateral. In the latter instances, these proceedings are sometimes followed by
court-authorized liquidations. All such proceedings require outside counsel with
attendant professional fees and expenses. The Company has never been named as a
defendant in any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On April 15, 2003, the Registrant's common stock began trading on the
OTCBB under the symbol WCAP. From September 26, 2002 until April 15, 2003, the
Registrant's common stock was listed on the Nasdaq SmallCap Market. Previously,
the Registrant's common stock was listed on the Nasdaq National Market. The
reported high and low bid quotations for the Registrant's common stock as
reported by Nasdaq from April 1, 2002 to April 14, 2003 and as reported on the
OTCBB from April 15, 2003 until June 18, 2004 were as follows:
Common Stock
--------------------
High Low
-------- --------
April 1 - June 30, 2002 .............................. $ 1.60 $ 0.78
July 1 - September 30, 2002........................... 0.90 0.31
October 1 - December 31, 2002......................... 1.10 0.28
January 1 - March 31, 2003............................ 0.47 0.30
April 1 - June 30, 2003............................... 0.51 0.15
July 1 - September 30, 2003........................... 0.30 0.15
October 1 - December 31, 2003......................... 0.35 0.18
January 1 - March 31, 2004............................ 0.45 0.17
April 1 - June 18, 2004............................... $ 1.65 $ 0.41
- --------------------------------------------------------------------------------
The foregoing quotations reflect inter-dealer prices, without retail
markup, markdown or commission, and do not necessarily represent actual
transactions.
As of June 18, 2004, the Company estimates that its shares of common
stock are held by approximately 4,131 beneficial holders.
Item 6. Selected Financial Data
See Summary of Financial Information for the years ended March 31,
2004, 2003, 2002, 2001 and 2000 on the following page:
9
WINFIELD CAPITAL CORP.
SUMMARY OF FINANCIAL INFORMATION
Years Ended March 31,
-------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
Statement of Operations Data
Total investment income ............... $ 1,550,947 $ 729,897 $ 1,057,404 $ 1,185,799 $ 873,445
Total investment expenses ............. $ 2,868,163 $ 4,086,185 $ 3,641,686 $ 3,232,652 $ 3,432,819
Net realized gains (losses) on
disposition of investments ........ $ 1,191,185 $ 16,407 $ (3,289,935) $ 1,282,344 $ 30,851,848
Unrealized appreciation (depreciation)
on loans and investments .......... $ 1,262,680 $ (2,654,690) $ (8,492,858) $ (69,828,667) $ 42,284,344
Net income (loss) ..................... $ 1,136,649 $ (5,994,571) $ (14,367,075) $ (70,593,176) $ 70,576,818
Earnings (loss) per share - Basic ..... $ 0.21 $ (1.12) $ (2.69) $ (13.20) $ 13.36
Weighted average number of shares
outstanding ....................... 5,346,084 5,346,084 5,346,084 5,346,084 5,282,131
Other Operating Data
Number of loans and other investments
outstanding at end of periiod ..... 41 44 37 50 64
Number of loans and other investments
originated ........................ 6 7 4 7 22
Principal amount of loans and other
investments originated ............ $ 154,905 $ 7,618,912 $ 367,676 $ 9,637,953 $ 18,624,388
Investment expenses as a percentage of
average net assets ................ 139.3% 94.0% 22.3% 6.9% 4.8%
Balance Sheet Data
Loans and investment portfolio
including assets acquired in
liquidation ....................... $ 18,301,052 $ 18,591,630 $ 14,129,234 $ 30,256,226 $ 102,739,179
Total assets .......................... $ 23,918,679 $ 26,656,254 $ 32,498,086 $ 49,031,295 $ 126,867,621
SBA debentures ........................ $ 19,536,660 $ 24,650,000 $ 24,650,000 $ 25,550,000 $ 20,850,000
Common stock (including additional paid
in-capital) ....................... $ 18,445,415 $ 19,762,631 $ 23,036,159 $ 24,806,818 $ 26,968,537
(Accumulated deficit) retained earnings $ (2,902,553) $ (4,093,738) $ (4,027,385) $ 1,352,362 $ (44,848)
Total shareholders' equity ............ $ 2,627,744 $ 1,491,095 $ 7,485,666 $ 23,128,930 $ 93,722,106
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Years Ended March 31, 2004, 2003, and 2002
------------------------------------------
Critical Accounting Policies
- ----------------------------
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles ("GAAP") requires the application of
accounting policies that often involve a significant degree of judgment.
Management, on an on-going basis, reviews estimates and assumptions. If
management determines, as a result of its consideration of facts and
circumstances, that modifications of its assumptions and estimates are
appropriate, results of operations and financial position as reported in the
financial statements may change significantly. The following sections discuss
accounting policies applied in preparing the Company's financial statements that
management believes are most dependent on the application of estimates and
assumptions.
Valuation of Investments
Securities that are traded on a securities exchange or the Nasdaq
National Market, which are not restricted investments, are valued at the
security's last sales price on the last trading day of the period. Securities
traded over-the-counter are valued at the closing price on the valuation date. A
valuation discount is applied if the number of securities held is substantial in
relation to the average daily trading volume.
The Company's investments in restricted securities of public companies
are valued at the closing price on the valuation date less a discount rate of
10% to 30%, which is determined by the Board of Directors of the Company (the
"Board of Directors") based upon applicable factors such as resale restrictions,
contractual agreement, size of position held and trading history of the
portfolio company. In some cases, a discount of greater than 30% may be used
based upon applicable factors including, but not limited to (by way of example):
1) whether the portfolio company will be financially solvent at the time such
restricted securities become freely tradable, 2) whether the Company has
knowledge of material non-public information about the portfolio company which
it is not at liberty to disclose in connection with its sale of the securities
of such portfolio company and 3) the risk that the portfolio company's
securities might be delisted from an exchange or automated trading market with
published trading reports.
Loans and assets acquired in liquidation for which no public market
exists are stated at "fair value" as determined in good faith by the Board of
Directors. The carrying values of loans to small business concerns are based on
the Board of Directors' evaluation of the financial condition of the borrowers
and/or the underlying collateral. The values assigned are considered to be
amounts which could be realized in the normal course of business which
anticipates the Company holding the loans to maturity and realizing the face
value of the loans. The carrying value of loans normally corresponds to cost
less amortized original issue discount, if any, unless adverse factors lead to a
determination of value at a lower amount. In such instances, the Company records
an increase in unrealized depreciation of investments to reduce the carrying
value of such loans to a fair value, as determined by the Board of Directors.
Investments in non-public companies securities (including equity
investments, warrants and convertible instruments) are recorded at fair value as
determined in good faith by the Board of Directors, after consideration of all
pertinent information, including factors such as significant equity financing by
sophisticated, unrelated new investors, history of cash flows from operations,
the market for comparable publicly traded companies (discounted for illiquidity)
and other pertinent factors. The values assigned to these securities are based
upon available information and do not necessarily represent amounts which might
ultimately be realized, since such amounts depend on future circumstances and
cannot reasonably be determined until the individual positions are liquidated.
Certain of the Company's loans are delinquent as to the required
principal and/or interest due under the respective loan agreements. Loans are
generally considered to be in default when they become 180 days past due
pursuant to SBA regulations. However, on a case by case basis, management will
consider, based on available information, the appropriateness of the continued
accrual of interest and the carrying value of the loan.
11
Option Contracts - Derivatives
The Company adopted Statement of Financial Accounting Standards No. 133
as amended by Statements No. 137 and No. 138, Accounting for Derivative
Instruments and Hedging Activities, (referred to hereafter as "SFAS 133"), on
January 1, 2001. At that time, the Company did not have any derivatives. SFAS
133 requires that an entity recognize all derivative instruments in the balance
sheet and measure those financial instruments at fair value. All changes in the
fair market value of financial instruments are included as changes in the
unrealized appreciation or depreciation of investments in the Statement of
Operations.
Income Taxes
Effective April 1, 1996, the Company has elected to be taxed as a
Regulated Investment Company ("RIC") under Subchapter M of the Internal Revenue
Code (the "Code"). If the Company, as a RIC, satisfies certain requirements
relating to the source of its income, the diversification of its assets and the
distribution of its net income, the Company is taxed as a pass-through entity
which acts as a partial conduit of income to its shareholders.
In order to maintain its RIC status, the Company must in general: 1.)
derive at least 90% of its gross income from dividends, interest and gains from
the sale or disposition of securities, 2.) meet investment diversification
requirements defined by the Code, and 3.) distribute to shareholders 90% of its
net income (other than long-term capital gains).
The Company may periodically make reclassifications among certain of
its capital accounts as a result of timing and characterization of certain
income and capital gains distributions determined annually in accordance with
Federal tax regulation. The reclassifications may result in a reduction of
capital. All reclassifications have been reflected on the statements of changes
in shareholders' equity.
Investment Income
- -----------------
Investment income increased by $821,050, or an increase of 112.5%, to
$1,550,947 for the year ended March 31, 2004 from $729,897 for the year ended
March 31, 2003. This reflected principally an increase in interest from small
business concerns of $1,031,061 as a result of the Company's increased
investments in loans in the last two quarters of fiscal 2003. Interest from
temporarily invested funds decreased by $209,209 as a result of a decrease in
invested idle funds as well as a decrease in interest rates. Other income
decreased by $802.
Investment income decreased by $327,507 or a decrease of 30.9%, from
$1,057,404 for the year ended March 31, 2002 to $729,897 for the year ended
March 31, 2003. This reflected principally a $620,128 decrease in interest from
temporarily invested funds as a result of a decrease in the idle funds that were
being invested along with a decrease in interest rates, which was partially
offset by a $294,737 increase in interest from small business concerns as a
result of the Company's increased level of investment activity.
Interest Expense
- ----------------
Interest expense decreased by $213,074 to $1,665,409 for the year ended
March 31, 2004 from $1,878,483 for the year ended March 31, 2003. This decrease
resulted from repayments of $5,113,340 of debentures to the SBA. Interest
expense remained relatively unchanged from $1,910,394 for the year ended March
31, 2002 to $1,878,483 for the year ended March 31, 2003.
Operating Expenses
- ------------------
The Company's operating expenses decreased by $1,004,948 to $1,202,754
for the year ended March 31, 2004 from $2,207,702 for the year ended March 31,
2003. Amortization expense decreased by $574,428 primarily due to the
acceleration of the maturity of the SBA debentures which resulted in fully
expensing the related debenture fees in the year ended March 31, 2003. Payroll
and payroll-related expenses decreased by $217,536 due to the resignation of an
executive officer effective December 31, 2002 and the termination of a Secretary
effective December 31, 2003. Professional fees decreased by $66,756, shareholder
relations and other financial expenses decreased by $48,623, insurance expense
decreased by $37,009 and directors fees decreased by $23,725. There were other
miscellaneous decreases which totaled $36,871. The Company's operating expenses
increased from $1,731,292 for the year ended March 31, 2002 to $2,207,702 for
the year ended March 31, 2003 due primarily to the acceleration of the maturity
of the SBA debentures which resulted in fully expensing the related debenture
fees of $496,214 and an insurance expense increase of $35,421 due primarily to
the increased Directors and Officers insurance renewal premium. Partially
offsetting these increases were decreases in payroll and payroll-related
expenses of $52,678 due primarily to the resignation of an executive officer
effective December 31, 2002 and other operating costs that netted to $2,547.
12
Realized Gains or Losses on Equity Investments
- ----------------------------------------------
The Company realizes gains or losses on its investments or rights to
acquire investments upon the disposition or write-offs thereof. The realized
capital gain for the year ended March 31, 2004 of $1,191,185 reflected long-term
capital gains on the sale of four equity securities of $1,437,675 and a gain of
$107,396 on the disposition of two loans partially off-set by a long-term
capital loss of $340,965 on the sale of one equity security and a write-off on
an asset acquired in liquidation of $24,707 partially offset by two recoveries
totaling $11,786. The realized capital gain for the year ended March 31, 2003 of
$16,407 reflected a long-term capital gain on an equity security of $208,287, a
short-term capital gain on an equity security of $50,680 partially offset by a
write-off of $182,001 on a debt security, long-term net capital losses on assets
acquired in liquidation of $45,168 and short-term losses on the repositioning of
temporarily invested funds of $15,391. The realized loss of $3,289,935 for the
year ended March 31, 2002 reflected long-term net capital losses on equity
securities of $1,039,442 and write-offs totaling $2,337,716 offset by an equity
security recovery of $87,223.
Unrealized Appreciation or Depreciation of Loans and Investments
- ----------------------------------------------------------------
As an investment company, the Company is required to evaluate its
investment portfolio periodically to determine the fair value of the portfolio
and, accordingly, does not maintain an allowance for loan losses similar to
commercial banks. Any change in the fair value of loans and other investments is
reflected in unrealized appreciation or depreciation of loans and investments.
There was unrealized appreciation on loans and investments of $1,262,680 for the
year ended March 31, 2004 (principally reflecting the increased market price of
investments in four publicly traded portfolio companies and the increased fair
value of an investment in one privately held portfolio company partially offset
by the decreased fair value of investments in two privately held portfolio
companies). There was unrealized depreciation on loans and investments of
$2,654,690 (or $2,692,012 excluding an unrealized appreciation on short-term
marketable securities) for the year ended March 31, 2003 (principally reflecting
the decreased market price of investments in nine publicly traded portfolio
companies partially offset by the increased market price of one publicly traded
portfolio company and the decreased fair value of investments in five privately
held portfolio companies partially offset by the increased fair value of
investments in five privately held portfolio companies compared with an
unrealized depreciation on loans and investments of $8,492,858 (or $8,395,076
excluding an unrealized depreciation on short-term marketable securities) for
the year ended March 31, 2002 (principally reflecting the decreased market price
of investments in six publicly traded portfolio companies and the decreased fair
value of investments in six privately held portfolio companies as well as the
aforementioned net loss on the sale of equities).
Option Contracts - Derivatives
- ------------------------------
Pursuant to a letter received from the SBA in October 2000 granting
permission to use hedging activities to protect its security positions, the
Company, beginning in January 2001, utilized put and call option contracts to
minimize market risks of its investments in publicly held companies. The Company
adopted SFAS 133 on January 1, 2001. SFAS 133 requires that an entity recognize
all derivative instruments in the balance sheet and measure those financial
instruments at fair value. All changes in the fair market value of financial
instruments are included as changes in the unrealized appreciation or
depreciation of investments in the Statement of Operations. During the fiscal
year ended March 31, 2002, all the option contracts became due. As of March 31,
2004, the Company has no option contracts outstanding as part of its portfolio.
Liquidity and Capital Resources
- -------------------------------
At March 31, 2004, the Company held cash totaling $5,473,063.
According to the U.S. Small Business Administration (the "SBA")
Regulations, the Company is required to be in compliance with the capital
impairment rules, as defined by regulation 107.1830 of the SBA Regulations. The
Company was notified by the SBA on April 30, 2003 that the Company was no longer
in compliance with the SBA's capital impairment requirements and that the SBA
had accelerated the maturity date of the Company's debentures. The aggregate
principal, interest and fees due under the debentures totaled approximately
$25.6 million as of April 30, 2003, including interest and fees due through the
next semi-annual payment date. As a result of subsequent repayments by the
Company, the aggregate principal, interest and fees due under the debentures
totaled approximately $21.1 million as of March 31, 2004, including interest and
fees due through the next semi-annual payment date. The SBA has transferred
13
Winfield Capital's account to liquidation status where any new investments and
material expenses are subject to prior SBA approval. Based on discussions and
meetings that the Company has had with the SBA to date, the SBA will not afford
the Company the flexibility of a self-managed liquidation to repay its
indebtedness. As a result, the Company anticipates that it will be required to
repay all or substantially all of the principal and interest owing to the SBA on
a schedule acceptable to the SBA. No definitive agreement has been reached with
the SBA and the SBA maintains the ability to pursue any remedies they deem
appropriate under the law or the instruments evidencing the Company's
indebtedness, including, without limitation, initiating proceedings for the
appointment of the SBA or its designee as receiver. If the SBA were to require
the Company to immediately pay back the entire indebtedness including accrued
interest, certain private security investments may need to be disposed of in a
forced sale which may result in proceeds less than their carrying value at March
31, 2004. As such, this impairment could have a material adverse effect on the
Company's financial position, results of operations and cash flows which raises
substantial doubt about the Company's ability to continue as a going concern.
The Company continues to explore various strategic alternatives, including a
third party equity infusion, although there can be no assurance that it will be
successful in its ability to consummate or implement these or any other
strategic alternatives.
Debentures Payable to the U.S. Small Business Administration
- ------------------------------------------------------------
Debentures payable to the SBA at March 31, 2004, with interest payable
semi-annually, consisted of the following:
Amount Due Date Interest Rate (per annum)
------------- ---------- -------------------------
$ 750,000 9/1/2005 6.875%
600,000 9/1/2005 6.875%
5,000,000 6/1/2006 7.710%
3,000,000 3/1/2009 6.240%
4,000,000 3/1/2009 6.240%
1,186,660 9/1/2009 7.220%
5,000,000 3/1/2011 6.353%
-------------
$ 19,536,660
=============
Under the terms of the debentures, the Company may not repurchase or
retire any of its capital stock, make any distributions to its shareholders
other than dividends out of retained earnings pursuant to SBA regulations or
increase officers' salaries without the prior written approval of the SBA. In
February 2002, the Company paid a non-refundable commitment fee of $40,000 to
the SBA to reserve $4,000,000 of SBA Guaranteed Debentures. As of March 31,
2003, the Company has not drawn on this commitment.
On April 30, 2003, the SBA notified the Company that it was no longer
in compliance with the SBA's capital impairment rules, as defined by regulation
107.1830 of the SBA Regulations. Based on this non-compliance, the SBA has
accelerated the maturity date of the Company's debentures to a single demand
note including accrued interest. Interest payments are no longer due on a
semi-annual basis, but interest continues to accrue. As such, the total
remaining balance of debt issuance costs of $496,214 was accelerated at March
31, 2003 due to the acceleration of the indebtedness.
Commitments and Contingencies
The Company has an operating lease on its office facility which expires
in February 2008. The following are the future minimum rental commitments on the
lease:
Payments Due By Period
------------------------------------------------------------------------
Less Than More than
Total 1 Year 1-3 Years 4-5 Years 5 Years
------------ ------------ ------------ ------------ ------------
Operating lease $ 194,909 $ 47,624 $ 98,641 $ 48,644 $ --
============ ============ ============ ============ ============
14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's earnings and cash flows are subject to fluctuations due
to changes in interest rates primarily from its investment of available cash
balances in bank money market funds with portfolios of investment grade
corporate and U.S. government securities, in individual bank certificates of
deposit and U.S. treasuries. Under its current policies, the Company does not
use interest rate derivative instruments to manage exposure to interest rate
changes.
A portion of the Company's investment portfolio consists of fixed-rate
debt securities. Since these debt securities usually have relatively high fixed
rates of interest, minor changes in market yields of publicly traded debt
securities have little or no effect on the values of debt securities in the
Company's portfolio and no effect on interest income. On the other hand,
significant changes in the market yields of publicly traded debt securities may
have a material effect on the values of debt securities in the Company's
portfolio. The Company's investments in debt securities are generally held to
maturity and their fair values are determined on the basis of the terms of the
debt security and the financial condition of the issuer. As of March 31, 2004,
the Company had no publicly traded debt securities in its portfolio.
A portion of the Company's investment portfolio consists of debt and
equity securities of private companies. The Company anticipates little or no
effect on the value of these investments from modest changes in public market
equity valuations. Should significant changes in market valuations of comparable
publicly owned companies occur, there may a be corresponding effect on
valuations of private companies, which would affect the value, amount and timing
of proceeds eventually realized from these investments. A portion of the
Company's investment portfolio also consists of restricted common stocks and
warrants to purchase common stocks of publicly owned companies. The fair values
of these restricted securities are influenced by the nature of applicable resale
restrictions, the underlying earnings and financial condition of the issuer and
the market valuations of comparable publicly owned companies. A portion of the
Company's investment portfolio also consists of unrestricted, freely marketable
common stocks of publicly owned companies. These freely marketable securities
are directly exposed to equity price fluctuations, in that a change in an
issuer's public market equity price would result in an identical change in the
fair value of the Company's investment in such security. The Company may
utilize, if they are available, put and call option contracts to attempt to
minimize the market risk of its investments in publicly owned companies. As of
March 31, 2004, the Company had no option contracts outstanding as part of its
portfolio.
Item 8. Financial Statements and Supplementary Data
Page
----
Report of Independent Auditors - Current ........................... F-1
Report of Independent Auditors - Predecessor ....................... F-2
Balance Sheets ..................................................... F-3
Statements of Operations ........................................... F-4
Statements of Changes in Shareholders' Equity....................... F-5
Statements of Cash Flows ........................................... F-6
Financial Highlights (Per Share Data and Ratios/Supplemental Data).. F-7
Notes to Financial Statements....................................... F-8 through F-18
Portfolio of Investments............................................ F-19 through F-26
Item 9. Changes in and Disagreements with Auditors on Accounting and
Financial Disclosure
On October 18, 2003 a Form 8-K was filed by the Company in connection
with a change in the Company's certifying auditors. PricewaterhouseCoopers LLP
resigned as the independent auditors of the Company on October 8, 2003. On
October 14, 2003 with approval of the Company's Board of Directors, the Company
engaged the accounting firm of Lazar Levine & Felix LLP as its independent
auditors beginning with the fiscal year ending March 31, 2004 and to review the
Company's interim financial statements beginning with the fiscal quarter ended
September 30, 2003.
15
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As of the end of the period covered by this Annual Report on Form 10-K,
we evaluated, under the supervision our chief executive officer and chief
financial officer, the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934, Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our
management, including our chief executive officer and chief financial officer,
has concluded that as of the date of the evaluation our disclosure controls and
procedures are effective to ensure that all material information required to be
filed in this report has been made known to them.
(b) Changes in Internal Controls over Financial Reporting
-----------------------------------------------------
There have been no changes in our internal controls over financial
reporting that occurred during the fourth quarter of the fiscal year ended March
31, 2004 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference to the Registrant's definitive proxy
statement to be filed not later than 120 days after March 31, 2004.
Item 11. Executive Compensation
Incorporated by reference to the Registrant's definitive proxy
statement to be filed not later than 120 days after March 31, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Registrant's definitive proxy
statement to be filed not later than 120 days after March 31, 2004.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Registrant's definitive proxy
statement to be filed not later than 120 days after March 31, 2004.
Item 14. Principal Accountant Fees and Services
Incorporated by reference to the Registrant's definitive proxy
statement to be filed not later than 120 days after March 31, 2004.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements:
See item 8 of Part II hereof.
16
(b) No reports on Form 8-K were filed during the fourth quarter of the
Registrant's fiscal year ended March 31, 2004. The Registrant
filed a report on Form 8-K on October 18, 2003, incorporated by
reference to Exhibit 99.1 of the Registrant's Form 10-K for the
fiscal year ended March 31, 2004 in SEC File No. 33-94322 .
(c) Exhibits:
3(A). Certificate of Incorporation, as amended, incorporated
by reference to Exhibit 1(A) to the Registrant's
registration statement in SEC File No. 33-94322.
3(B). Certificate of Amendment of Certificate of
Incorporation, incorporated by reference to Exhibit
1(B) to the Registrant's registration statement in SEC
File No. 33-94322.
3(C). By-laws, as amended, incorporated by reference to
Exhibit 2 to the Registrant's registration statement in
SEC File No. 33-94322.
4(B). Form of Debenture incorporated by reference to Exhibit
3(C) to the Registrant's registration statement in SEC
File No. 33-94322.
4(C). Agency Agreement for the Debentures, incorporated by
reference to Exhibit 3(D) to the Registrant's
registration statement in SEC File No. 33-94322.
10(A) Indemnification Agreement, incorporated by reference to
Exhibit 4 to the Registrant's registration statement in
SEC File No. 33-94322.
10(B). Stock Option Plan, incorporated by reference to Exhibit
5 to the Registrant's registration statement in SEC
File No. 33-94322.
10(C). Registrant's License from SBA, incorporated by
reference to Exhibit 6 to the Registrant's registration
statement in SEC File No. 33-94322.
10(E)(2). Stock Option Agreement with Paul A. Perlin,
incorporated by reference to Exhibit 8(B) to the
Registrant's registration statement in SEC File No.
33-94322.
10(I). Employment Agreement with Paul A. Perlin, dated April
4, 2001 as of November 1, 2000 incorporated by
reference to Exhibit 10(I) to the Registrant's Form
10-K for the fiscal year ended March 31, 2001 in SEC
File No. 33-94322 .
10(J). Employment Agreement with David Greenberg, dated April
4, 2001 as of November 1, 2000, incorporated by
reference to Exhibit 10(J) to the Registrant's Form
10-K for the fiscal year ended March 31, 2001 in SEC
File No. 33-94322 .
10(K). Employment Agreement with Paul A. Perlin, dated
November 15, 2002 as of November 1, 2002 incorporated
by reference to Exhibit 10(K) to the Registrant's Form
10-K for the fiscal year ended March 31, 2003 in SEC
File No. 33-94322 .
11. Statement of Computation of Earnings (Loss) Per Share,
incorporated herein by reference to the Notes to the
Financial Statements included in this report.
31.1 Certification of Paul A. Perlin, Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of R. Scot Perlin, Chief Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Paul A. Perlin, Chief Executive
Officer, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
17
32.2 Certification of R. Scot Perlin, Chief Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(d) Financial Statement Schedules: The schedules specified under
Regulation S-X are either included in this Form 10-K, not
applicable or are immaterial to the Company's financial statements
for each of the three years in the period ended March 31, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
WINFIELD CAPITAL CORP.
Dated: June 18, 2004 By: /s/ PAUL A. PERLIN
------------------------------
Paul A. Perlin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: June 18, 2004 By: /s/ PAUL A. PERLIN
------------------------------
Paul A. Perlin
Chairman of the Board &
Chief Executive Officer
(Principal Executive Officer) & Director
Dated: June 18, 2004 By: /s/ R. SCOT PERLIN
------------------------------
R. Scot Perlin
Chief Financial Officer
(Principal Financial &
Accounting Officer) & Director
Dated: June 18, 2004 By: /s/ JOEL I. BARAD
------------------------------
Joel I. Barad
Director
Dated: June 18, 2004 By: /s/ BARRY J. GORDON
------------------------------
Barry J. Gordon
Director
Dated: June 18, 2004 By: /s/ DAVID GREENBERG
------------------------------
David Greenberg
Director
Dated: June 18, 2004 By: /s/ BRUCE A. KAUFMAN
------------------------------
Bruce A. Kaufman
Director
Dated: June 18, 2004 By: /s/ ALLEN L. WEINGARTEN
------------------------------
Allen L. Weingarten
Director
18
WINFIELD CAPITAL CORP.
MARCH 31, 2004 AND 2003
CONTENTS
Page
----
Report of Independent Auditors - Current F-1
Report of Independent Auditors - Predecessor F-2
Balance Sheets F-3
(At March 31, 2004 and 2003)
Statements of Operations F-4
(For each of the three years in the period ended March 31, 2004)
Statements of Changes in Shareholders' Equity F-5
(For each of the three years in the period ended March 31, 2004)
Statements of Cash Flows F-6
(For each of the three years in the period ended March 31, 2004)
Financial Highlights F-7
Per Share Operating Performance
(For the years ended March 31, 2004 and 2003)
Ratios/Supplemental Data
(For the years ended March 31, 2004 and 2003)
Notes to Financial Statements F-8 - F-18
Portfolio of Investments F-19 - F-26
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Shareholders
of Winfield Capital Corp.
(A Small Business Investment Company licensed
by the U.S. Small Business Administration ("SBA"))
White Plains, NY
We have audited the accompanying balance sheet of Winfield Capital Corp. as of
March 31, 2004 and the related statements of operations, changes in
shareholders' equity and cash flows for the year then ended. Our audit also
included the financial statement schedules listed in accompanying index of this
Form 10-K. These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedules are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedules. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Winfield Capital Corp. at March
31, 2004 and the results of their operations and their cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and its debentures payable to the SBA are currently due as a result of an
impairment under SBA regulations. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plan in
regard to these matters is also described in Note 2. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ LAZAR LEVINE & FELIX LLP
- ----------------------------
Lazar Levine & Felix LLP
New York, NY
June 7, 2004
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Winfield Capital Corp.
(A Small Business Investment Company licensed by
the U.S. Small Business Administration ("SBA")):
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Winfield
Capital Corp. at March 31, 2003, and the results of its operations and its cash
flows for each of the two years in the period ended March 31, 2003 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedules listed in the
accompanying index present fairly, in all material respects, the information set
forth therein when read in conjunction with the related financial statements.
These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and its debentures payable to the SBA are currently due as a result of an
impairment under SBA regulations. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PricewaterhouseCoopers LLP
New York, NY
June 13, 2003
F-2
WINFIELD CAPITAL CORP.
BALANCE SHEETS
Years Ended March 31,
----------------------------
2004 2003
------------ ------------
ASSETS
Investments, at value:
Loans and notes receivable (cost:
$10,569,529 and $10,365,361, respectively) $ 8,483,825 $ 8,371,521
Equity interests in small business
concerns (cost: $20,646,641 and
$22,372,142, respectively) 9,817,227 10,220,109
Assets acquired in liquidation
(cost: $0 and $24,707,
respectively) -- --
------------ ------------
Total investments 18,301,052 18,591,630
Cash and cash equivalents 5,473,063 4,396,206
Short-term marketable securities -- 3,454,226
Accrued interest receivable 62,070 85,276
Furniture and equipment (net of accumulated
depreciation of $47,316 and $41,880,
respectively) 11,088 13,246
Other assets 71,406 115,670
------------ ------------
Total assets $ 23,918,679 $ 26,656,254
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debentures payable to the U.S. Small
Business Administration $ 19,536,660 $ 24,650,000
Deferred income 101,922 129,102
Accrued expenses 1,652,353 386,057
------------ ------------
Total liabilities 21,290,935 25,165,159
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock - $.001 par value; Authorized -
1,000,000 shares; issued and outstanding - none
Common stock - $.01 par value; Authorized -
30,000,000 shares at March 31, 2004 and 2003;
issued and outstanding - 5,346,084 shares
at March 31, 2004 and 2003 53,461 53,461
Additional paid-in capital 18,391,954 19,709,170
Accumulated deficit (2,902,553) (4,093,738)
Unrealized depreciation on investments, net (12,915,118) (14,177,798)
------------ ------------
Total shareholders' equity 2,627,744 1,491,095
------------ ------------
Total liabilities and shareholders' equity $ 23,918,679 $ 26,656,254
============ ============
The accompanying notes are an integral part of the financial statements.
F-3
WINFIELD CAPITAL CORP.
STATEMENTS OF OPERATIONS
Years Ended March 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Investment income:
Interest from small business concerns $ 1,490,908 $ 459,847 $ 165,110
Interest from invested idle funds 50,737 259,946 880,074
Loan processing fees -- -- 927
Other income 9,302 10,104 11,293
------------ ------------ ------------
Total investment income 1,550,947 729,897 1,057,404
------------ ------------ ------------
Expenses:
Interest 1,665,409 1,878,483 1,910,394
Payroll and payroll-related expenses 609,314 826,850 879,529
General and administrative expenses 370,068 474,219 448,381
Professional fees 173,933 240,689 259,880
Depreciation and amortization 5,436 580,113 85,358
Other operating costs 44,003 85,831 58,144
------------ ------------ ------------
Total investment expenses 2,868,163 4,086,185 3,641,686
------------ ------------ ------------
Investment loss - net (1,317,216) (3,356,288) (2,584,282)
------------ ------------ ------------
Realized gains (losses) on investments,
net 1,191,185 16,407 (3,289,935)
Change in unrealized appreciation
(depreciation) of investments 1,262,680 (2,654,690) (8,492,858)
------------ ------------ ------------
Gain (loss) on
investments, net 2,453,865 (2,638,283) (11,782,793)
------------ ------------ ------------
Net increase (decrease)
in shareholders'
equity resulting from
operations $ 1,136,649 $ (5,994,571) $(14,367,075)
============ ============ ============
Per share net increase (decrease)
in shareholders' equity resulting
from operations:
Basic $ 0.21 $ (1.12) $ (2.69)
============ ============ ============
Diluted $ 0.21 $ (1.12) $ (2.69)
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-4
WINFIELD CAPITAL CORP.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Accumulated Deficit)
Retained Earnings
---------------------------
Unrealized
Net Net Appreciation
Common Stock Additional Undistributed Undistributed (Depreciation) on
--------------------------- Paid-In Investment Realized Investments -
Shares Amount Capital Income/(Loss) Gain/(Loss) net Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance - April 1,
2001 5,346,084 $ 53,461 $ 24,753,357 $ 76,172 $ 1,276,190 $ (3,030,250) $ 23,128,930
Net (decrease)
increase
in shareholders'
equity
resulting from
operations (2,584,282) (3,289,935) (8,492,858) (14,367,075)
Dividends paid (1,276,189) (1,276,189)
Reclassification
as described in
Note 3 (1,770,659) 2,612,856 (842,197)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance - March 31,
2002 5,346,084 53,461 22,982,698 104,746 (4,132,131) (11,523,108) 7,485,666
Net (decrease)
increase
in shareholders'
equity
resulting from
operations (3,356,288) 16,407 (2,654,690) (5,994,571)
Reclassification
as described in
Note 3 (3,273,528) 3,251,542 21,986
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance - March 31,
2003 5,346,084 53,461 19,709,170 -- (4,093,738) (14,177,798) 1,491,095
Net (decrease)
increase
in shareholders'
equity
resulting from
operations (1,317,216) 1,191,185 1,262,680 1,136,649
Reclassification
as described in
Note 3 (1,317,216) 1,317,216
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance - March 31,
2004 5,346,084 $ 53,461 $ 18,391,954 $ -- $ (2,902,553) $(12,915,118) $ 2,627,744
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-5
WINFIELD CAPITAL CORP.
STATEMENTS OF CASH FLOWS
Years Ended March 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Operating activities
Net increase (decrease) in shareholders' equity resulting from operations $ 1,136,649 ($ 5,994,571) ($14,367,075)
Adjustments to reconcile net increase (decrease) in shareholders' equity
resulting from operations to net cash used in operating activities:
Realized (gains) losses on investments, net (1,191,185) (16,407) 3,289,935
Change in unrealized (appreciation) depreciation of investments (1,255,461) 2,692,012 8,395,076
Change in unrealized (appreciation) depreciation of
short-term marketable securities (7,219) (37,322) 97,782
Depreciation and amortization of fixed assets 5,436 5,685 6,862
Accretion of interest to face value of notes (385,651) (115,147) --
Amortization of debenture costs -- 574,428 78,496
Decrease in receivable from broker -- -- 46,599
Decrease (increase) in accrued interest receivable 23,206 74,529 (152,927)
Decrease (increase) in other assets 44,264 (49,519) (9,244)
(Increase) in income taxes payable -- -- (23,404)
(Decrease) in deferred income (27,180) -- --
Increase in accrued expenses 1,266,296 23,637 33,459
------------ ------------ ------------
Net cash used in operating activities (390,845) (2,842,675) (2,604,441)
------------ ------------ ------------
Investing activities:
Purchases of short-term marketable securities -- (6,487,954) (13,735,656)
Proceeds from the maturity of short-term marketable securities 3,430,000 15,808,742 16,732,951
Proceeds from sale of equity interests and return of capital 2,823,397 920,337 4,524,282
Investments originated (154,905) (7,618,912) (367,676)
Proceeds from collection of loans 485,828 199,679 102,105
Acquisition of fixed assets (3,278) -- (11,724)
------------ ------------ ------------
Net cash provided by investing activities 6,581,042 2,821,892 7,244,282
------------ ------------ ------------
Financing activities:
Repayment of debentures payable to SBA (5,113,340) -- (900,000)
Debenture costs paid -- -- (40,000)
Dividends paid -- -- (1,276,189)
------------ ------------ ------------
Net cash used in financing activities (5,113,340) -- (2,216,189)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,076,857 (20,783) 2,423,652
Cash and cash equivalents - beginning of year 4,396,206 4,416,989 1,993,337
------------ ------------ ------------
Cash and cash equivalents - end of year $ 5,473,063 $ 4,396,206 $ 4,416,989
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 330,392 $ 1,878,483 $ 1,889,523
============ ============ ============
Supplemental schedule of non-cash investing and financing activities:
Conversion of loans and notes receivable into equity interests -- $ 3,125 $ 18,370
------------ ------------ ------------
Receivable from escrow account $ -- $ -- $ 197,369
------------ ------------ ------------
The accompanying notes are an integral part of the financial statements.
F-6
WINFIELD CAPITAL CORP.
FINANCIAL HIGHLIGHTS
Years Ended March 31,
-------------------------------
2004 2003
------------- -------------
Per Share Operating Performance
Shareholders' equity, beginning of period $ .28 $ 1.40
------------- -------------
Investment loss - net (0.25) (0.63)
Net realized and unrealized gain (loss)
on investments 0.46 (0.49)
------------- -------------
Total from investment operations 0.21 (1.12)
------------- -------------
Dividends paid -- --
------------- -------------
Shareholders' equity, end of year $ .49 $ .28
============= =============
Per share market value, end of year $ .42 $ .36
============= =============
Shares outstanding, end of year 5,346,084 5,346,084
============= =============
Ratios/Supplemental Data
Shareholders' equity, end of period $ 2,627,744 $ 1,491,095
Ratio of investment expenses to average
shareholders' equity 139.27% 94.03%
Ratio of investment loss - net to average
shareholders' equity 63.96% 77.24%
F-7
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
1. Organization
Winfield Capital Corp. (the "Registrant" or the "Company") was
incorporated in 1972. The Company is a small business investment company
("SBIC") that was licensed by the U.S. Small Business Administration (the
"SBA") in 1972 under the Small Business Investment Act of 1958, as amended
(the "Small Business Investment Act"). The Company is a non-diversified
investment company that has elected to be regulated as a business
development company ("Business Development Company"), a type of closed-end
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"). Beginning April 1, 1996, the Company elected to be taxed as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code
of 1986, as amended.
The Company uses funds borrowed from the SBA, together with its own
capital, to provide loans to, and make equity investments in, independently
owned and operated business concerns that, in accordance with SBA
Regulations, (i) do not have a net worth in excess of $18 million and do not
have average net income after Federal income taxes for the preceding two
years of more than $6 million, or (ii) meet size standards set by the SBA
that are measured by either annual receipts or number of employees,
depending on the industry in which such concerns are primarily engaged
("Eligible Concerns"). The Company invests in all kinds and classes of
securities of portfolio companies, including, but not limited to, notes and
bonds; straight, senior, subordinated, convertible and interest-paying
debentures; preferred stock; common stock; and options and warrants to
purchase the foregoing. The Company's investments are made, with the
intention of having loans repaid within five years and equity investments
liquidated within 5 to 10 years. Situations may arise, however, where the
Company may hold an equity interest for a shorter or longer period.
2. Basis of Presentation
On April 11, 2003, the Company received notice from the Nasdaq
Stock Market, Inc. that effective April 15, 2003 the Company's securities
were delisted from the Nasdaq SmallCap Market. The Company's securities
became eligible for quotation on the OTC Bulletin Board effective April 15,
2003 with the assigned symbol "WCAP" (see Note 10).
According to the U.S. Small Business Administration (the "SBA")
Regulations, the Company is required to be in compliance with the capital
impairment rules, as defined by regulation 107.1830 of the SBA Regulations.
The Company was notified by the SBA on April 30, 2003 that the Company was
no longer in compliance with the SBA's capital impairment requirements and
that the SBA had accelerated the maturity date of the Company's debentures.
The aggregate principal, interest and fees due under the debentures totaled
approximately $25.6 million as of April 30, 2003, including interest and
fees due through the next semi-annual payment date. As a result of
subsequent repayments by the Company, the aggregate principal, interest and
fees due under the debentures totaled approximately $21.1 million as of
March 31, 2004, including interest and fees due through the next semi-annual
payment date. The SBA has transferred Winfield Capital's account to
liquidation status where any new investments and material expenses are
subject to prior SBA approval. Based on discussions and meetings that the
Company has had with the SBA to date, the SBA will not afford the Company
the flexibility of a self-managed liquidation to repay its indebtedness. As
a result, the Company anticipates that it will be required to repay all or
substantially all of the principal and interest owing to the SBA on a
schedule acceptable to the SBA. No definitive agreement has been reached
with the SBA and the SBA maintains the ability to pursue any remedies they
deem appropriate under the law or the instruments evidencing the Company's
indebtedness, including, without limitation, initiating proceedings for the
appointment of the SBA or its designee as receiver. If the SBA were to
require the Company to immediately pay back the entire indebtedness
including accrued interest, certain private security investments may need to
be disposed of in a forced sale which may result in proceeds less than their
carrying value at March 31, 2004. As such, this impairment could have a
material adverse effect on the Company's financial position, results of
operations and cash flows which raises substantial doubt about the Company's
ability to continue as a going concern. The Company continues to explore
various strategic alternatives, including a third party equity infusion,
although there can be no assurance that it will be successful in its ability
to consummate or implement these or any other strategic alternatives.
F-8
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
3. Summary of Significant Accounting Policies
Valuation of Investments
Securities that are traded on a securities exchange or the Nasdaq
National Market, which are not restricted investments, are valued at the
security's last sales price on the last trading day of the period.
Securities traded over-the-counter are valued at the closing price for the
valuation date.
In the fiscal year ended March 31, 2002, the Company, in accordance
with the Securities and Exchange Commission Guidelines and the AICPA Audit
of Investment Companies Guide, eliminated the blockage discount in
calculating the fair market value of its portfolio securities listed on the
national exchanges. If the Company had not changed its method of estimating
the fair market value of its portfolio securities, the additional loss for
the fiscal year 2002 would have been $179,220, or an additional loss of $.03
per share.
The Company's investments in restricted securities of public
companies are valued at the closing price on the valuation date less a
discount rate of 10% to 30%, which is determined by the Board of Directors
of the Company (the "Board of Directors") based upon applicable factors such
as resale restrictions, contractual agreement and trading history of the
portfolio company. In some cases, a discount of greater than 30% may be used
based upon applicable factors including, but not limited to: 1) whether the
portfolio company will be financially solvent at the time such restricted
securities become freely tradable, 2) whether the Company has knowledge of
material non-public information about the portfolio company which it is not
at liberty to disclose in connection with its sale of the securities of such
portfolio company and 3) the risk that the portfolio company's securities
might be delisted from an exchange or automated trading market with
published trading reports. Investments in restricted securities, which have
been subjected to a discount as determined by the Board of Directors
amounted to $423,514 and $117,940 as of March 31, 2004 and 2003,
respectively.
Loans and assets acquired in liquidation for which no public market
exists are stated at "fair value" as determined in good faith by the Board
of Directors. The carrying values of loans to small business concerns are
based on the Board of Directors' evaluation of the financial condition of
the borrowers and/or the underlying collateral. The values assigned are
considered to be amounts which could be realized in the normal course of
business, which anticipates the Company holding the loans to maturity and
realizing the face value of the loans. The carrying value of loans normally
corresponds to cost less amortized original issue discount, if any, unless
adverse factors lead to a determination of value at a lower amount. In such
instances, the Company records an increase in unrealized depreciation of
investments to reduce the carrying value of such loans to a value, as
determined by the Board of Directors.
Investments in non-public companies (including equity investments,
warrants and convertible instruments) are recorded at fair value as
determined in good faith by the Board of Directors, after consideration of
all pertinent information, including factors such as significant equity
financing by sophisticated, unrelated new investors, history of cash flows
from operations, the market for comparable publicly traded companies
(discounted for illiquidity) and other pertinent factors. The values
assigned to these securities are based upon available information and do not
necessarily represent amounts which might ultimately be realized, since such
amounts depend on future circumstances and cannot reasonably be determined
until the individual positions are liquidated.
Certain of the Company's loans are delinquent as to the required
principal and/or interest due under the respective loan agreements. Loans
are generally considered to be in default when they become 180 days past due
pursuant to SBA regulations. However, on a case by case basis, management
will consider, based on available information, the appropriateness of the
continued accrual of interest and the carrying value of the loan.
F-9
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
At March 31, 2004 and 2003, the investment portfolio included
investments totaling $12,223,604 and $17,631,300, respectively, whose fair
values had been estimated by the Board of Directors in the absence of
readily ascertainable market values. Because of the inherent uncertainty of
the valuations, the values may differ significantly from the values that
would have been used had a ready market for the securities existed, and the
differences could be material.
At March 31, 2004 and 2003, all investments were in small business
concerns located in the United States of America.
Realized and Unrealized Gain or Loss
Realized gains or losses are recorded upon disposition of
investments and calculated as the difference between the proceeds from such
dispositions and the cost basis determined using the specific identification
method. The cost of investments that in the Board of Directors' judgment
have become permanently impaired, in whole or in part, are written off, and
such amounts are reported as realized losses. For the fiscal years ended
March 31, 2004, 2003 and 2002, net realized losses from write-offs after
recoveries totaled $12,921, $182,001 and $2,337,716, respectively. All other
changes in the valuation of portfolio investments are included as changes in
the unrealized appreciation or depreciation of investments in the statement
of operations.
At March 31, 2004 and 2003, the aggregate gross unrealized
depreciation of investments was $16,799,648 and $15,171,830, respectively,
and the aggregate gross unrealized appreciation of investments was
$3,884,530, and $1,001,251, respectively, resulting in a net unrealized
depreciation of $12,915,118 and $14,170,579, respectively (excluding
unrealized depreciation on short-term marketable securities of $0 and
$7,219, respectively).
Description of Loan Terms
The Company's loans to small business concerns range up to
approximately $5,400,000 in size, typically have a maturity of five years or
less, and, in many cases, are convertible into common stock or are
accompanied by warrants to purchase common stock of the borrower at a
nominal exercise price, subject in most cases to certain conditions.
The loans bear interest at rates ranging from 6.0% to 19.0%, per
annum. Interest is payable in monthly, quarterly, or semi-annual
installments with principal payments payable either over the term of the
loan or at maturity. These loans are generally collateralized by the assets
of the borrower, certain of which are subject to prior liens, and/or
guarantees. The Company seeks to maximize the difference, or "spread,"
between the rate at which it borrows funds from the SBA and the rate at
which it lends these funds to small business concerns. Interest rates are
subject to a cap determined by the SBA.
The Company also participates in syndicated loans.
Option Contracts - Derivatives
The Company adopted Statement of Financial Accounting Standards No.
133 as amended by Statements No. 137 and No. 138, Accounting for Derivative
Instruments and Hedging Activities, (referred to hereafter as "SFAS 133"),
on January 1, 2001. At that time, the Company did not have any derivatives.
SFAS 133 requires that an entity recognize all derivative instruments in the
balance sheet and measure those financial instruments at fair value. All
changes in the fair market value of financial instruments are included as
changes in the unrealized appreciation or depreciation of investments in the
statements of operations.
F-10
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
Assets Acquired in Liquidation
Assets acquired in liquidation ("Liquidations") include those loan
balances for which collateral in real estate and other assets have been
obtained by the Company and which have been or are in the process of being
liquidated. These Liquidations are carried at a value as determined in good
faith by the Board of Directors based upon amounts which the Company expects
to realize upon disposition of the collateral, on a discounted basis, after
reasonable selling expenses. The Company capitalizes expenditures related to
Liquidations subsequent to foreclosure on the collateral, and accrued
interest receivable as of the date of such foreclosure, if the Board of
Directors expects such amounts to be recovered by the Company.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash and cash
equivalents. The carrying amount reported in the balance sheet for cash and
cash equivalents approximates fair value.
Short-term Marketable Securities
Short-term marketable securities are carried at fair value.
Interest income earned on short-term marketable securities for the fiscal
years ended March 31, 2004, 2003 and 2002, was $14,589, $238,484, and
$821,713, respectively.
Deferred Debenture Costs
SBA debenture costs were amortized over ten years, which
represented the terms of the SBA debentures. See Note 5.
Revenue Recognition
Interest income is recognized as it is earned on short-term
marketable securities and debt investments. Dividend income from equity
investments is recognized as of the ex-dividend date.
Deferred Income
Loan origination fees paid to the Company are deferred and
amortized over the terms of the respective loans. Upon prepayment of loans,
any unamortized portion of the loan origination fees are recognized.
Furniture and Equipment
Furniture and equipment are carried at cost. The Company
depreciates furniture and office equipment over an estimated useful life of
10 years using the straight-line method except for computer equipment which
is depreciated under an accelerated method over five years.
Income Taxes
Effective April 1, 1996, the Company has elected to be taxed as a
Regulated Investment Company ("RIC") under Subchapter M of the Internal
Revenue Code (the "Code"). If the Company, as a RIC, satisfies certain
requirements relating to the source of its income, the diversification of
its assets and the distribution of its net income, the Company is taxed as a
pass-through entity which acts as a partial conduit of income to its
shareholders.
F-11
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
In order to maintain its RIC status, the Company must in general:
1) derive at least 90% of its gross income from dividends, interest and
gains from the sale or disposition of securities 2) meet investment
diversification requirements defined by the Code and 3) distribute to
shareholders 90% of its net income (other than long-term capital gains).
The Company may periodically make reclassifications among certain
of its capital accounts as a result of timing and characterization of
certain income and capital gains distributions determined annually in
accordance with Federal tax regulation. The reclassifications may result in
a reduction of capital. All reclassifications have been reflected on the
statements of changes in shareholders' equity.
Stock Options
The Company accounts for stock-based compensation relating to its
stock option plan using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations ("APB No. 25"). Under APB No. 25, compensation
cost is measured as the excess, if any, of the quoted market price of the
Company's shares at the date of grant over the exercise price of the option
granted. No compensation cost has been recognized in connection with the
Company's stock option plans. The Company provides additional pro forma
disclosures as required under Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock Based Compensation" (see Note 7).
Had the Company measured compensation expense under SFAS No. 123,
there would be no material impact to the net decrease in shareholders'
equity resulting from operations or the per share net increase (decrease) in
shareholders' equity resulting from operations for the years ended March 31,
2004, 2003 and 2002. The following table illustrates the effect on net
income (loss) and earnings (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Years Ended March 31,
----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net increase (decrease) in shareholders' equity, as reported $ 1,136,649 $ (5,994,571) $ (14,367,075)
Deduct: Total stock-based employee compensation as
Determined under the fair value based method for all
awards, net of related tax effects -- -- (17,628)
------------- ------------- -------------
Pro forma net increase (decrease) in shareholders' equity $ 1,136,649 $ (5,994,571) $ (14,384,703)
Basis - as reported $ 0.21 $ (1.12) $ (2.69)
Basis - pro forma $ 0.21 $ (1.12) $ (2.69)
The fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions for the fiscal year ended 2002 - expected volatility was
132%; risk-free interest of approximately 4.3%; and expected lives ranging
from 3 to 6 years.
Per Share Data
Under SFAS No. 128 "Earnings Per Share", net increase (decrease) in
shareholders' equity per share is computed by dividing net increase
(decrease) in shareholders' equity resulting from operations by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock.
F-12
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
Risks and Uncertainties
The Company is engaged in a high-risk business. Loans and other
investments to small business concerns are extremely speculative. Most of
such small business concerns are privately held. Even if a public market for
the securities of such concerns exists, the loans and other securities
purchased by the Company are often restricted against sale or other transfer
for specified periods of time. Thus, such loans and other investments have
little, if any, liquidity, and the Company must bear significantly larger
risks, including possible losses on such investments, than would be the case
with traditional investment companies. The market value of public securities
may fluctuate significantly in response to factors which are beyond the
Company's control.
In addition, see Note 2 with regard to certain uncertainties.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of income and expense during the
reporting period. The most significant estimates relate to the valuation of
investments. Actual results could differ from those estimates.
Recent Accounting Pronouncements
On July 30, 2002, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"), that is applicable to exit or disposal activities initiated after
December 31, 2002. This standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This standard
does not apply where SFAS 144 is applicable. This new standard does not
currently have any impact on the Company's operating results and financial
position.
On December 31, 2002, FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"), that is applicable to financial statements issued
for fiscal years ending after December 15, 2002. This standard amends
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") and provides guidance to companies
electing to voluntarily change to the fair value based method of accounting
for stock-based compensation. In addition, this standard amends SFAS 123 to
require more prominent and more frequent disclosures in financial statements
regarding the effects of stock-based compensation. This new standard does
not currently have any impact on the Company's operating results and
financial position.
During April 2003, the Financial Accounting Standards Board issued
SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133,"Accounting for
Derivative Instruments and Hedging Activities." The statement requires that
contracts with comparable characteristics be accounted for similarly and
clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003, except in certain
circumstances, and for hedging relationships designated after June 30, 2003.
This new standard does not currently have any impact on the Company's
operating results and financial position.
F-13
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
In December 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits -
an amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132 (revised
2003)"), effective for fiscal years beginning after December 15, 2002,
subject to certain exemptions. SFAS 132 (revised 2003) revises employers'
disclosures about pension plans and other postretirement benefit plans. It
does not change the measurement or recognition of those plans required by
Statement of Financial Accounting Standards No. 87, "Employers' Accounting
for Pensions," Statement of Financial Accounting Standards No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." This Statement retains the disclosure
requirements contained in Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"), which it replaces. It requires additional
disclosures to those in the original SFAS 132 about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension plans
and other defined benefit postretirement plans. The required information
should be provided separately for pension plans and for other postretirement
benefit plans. The Company adopted SFAS 132 (revised 2003) as of January 1,
2003. The effect of the adoption of this Statement was not material.
4. Fair Value of Financial Statements:
Short-term marketable securities
As of March 31, 2004 and 2003, short-term marketable securities
consisted of the following:
Years Ended March 31,
---------------------------
2004 2003
------------ ------------
U.S. Government obligations $ -- $ 1,299,597
Certificates of deposit -- 2,154,629
------------ ------------
$ -- $ 3,454,226
============ ============
As of March 31, 2004 and 2003, unrealized depreciation on
short-term marketable securities was $0 and $7,219, respectively.
Debentures payable to the U.S. Small Business Administration
The carrying amount of the Company's debentures payable to the SBA
approximates fair value.
Option Contracts
Beginning in January 2001, the Company utilized put and call option
contracts to minimize market risks of its investments in publicly held
companies. The unrealized net appreciation was presented at fair value based
on the market price of exchange listed options. During the fiscal year ended
March 31, 2002, all option contracts became due. As of March 31, 2004, the
Company has no option contracts outstanding as part of its portfolio.
5. Debentures Payable to the U.S. Small Business Administration:
Debentures payable to the SBA at March 31, 2004, with interest
payable semi-annually, consisted of the following:
F-14
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
Interest Rate
Amount Due Date (per annum)
------------ -------- -----------
$ 750,000 9/1/2005 6.875%
600,000 9/1/2005 6.875%
5,000,000 6/1/2006 7.710%
3,000,000 3/1/2009 6.240%
4,000,000 3/1/2009 6.240%
1,186,660 9/1/2009 7.220%
5,000,000 3/1/2011 6.353%
------------
$ 19,536,660
============
Under the terms of the debentures, the Company may not repurchase
or retire any of its capital stock, make any distributions to its
shareholders other than dividends out of retained earnings pursuant to SBA
regulations or increase officers' salaries without the prior written
approval of the SBA. In February 2002, the Company paid a non-refundable
commitment fee of $40,000 to the SBA to reserve $4,000,000 of SBA Guaranteed
Debentures. As of March 31, 2003, the Company has not drawn on this
commitment.
On April 30, 2003, the SBA notified the Company that it was no
longer in compliance with the SBA's capital impairment rules, as defined by
regulation 107.1830 of the SBA Regulations. Based on this non-compliance,
the SBA has accelerated the maturity date of the Company's debentures to a
single demand note including accrued interest. Interest payments are no
longer due on a semi-annual basis, but interest continues to accrue. As
such, the total remaining balance of debt issuance costs of $496,214 was
accelerated at March 31, 2003 due to the acceleration of the indebtedness.
6. Commitments and Contingencies:
The Company has an operating lease on its office facility which
expires in February 2008. Rent expense was $46,647, $46,150, and $45,291 for
the years ended March 31, 2004, 2003 and 2002, respectively. The following
are the minimum rental commitments for the next four fiscal years:
Fiscal Year Ending March 31,
------------------ ---------
2005 $ 47,624
2006 47,421
2007 51,220
2008 48,644
---------
$ 194,909
=========
The Company has an employment agreement with an officer which
provides for an annual compensation of $306,180 which expires on October 31,
2004.
7. Stock Option Plan:
In October 1995, which was subsequently amended by the shareholder
vote in September 1997, the Company adopted the 1995 stock option plan (the
"Plan") under which 1,250,000 shares of common stock were reserved for
issuance pursuant to options granted under the Plan. Under the Plan, options
intended to qualify as "incentive stock options" under Section 422 of the
code ("Qualified Options"), options not intended to qualify as qualified
options, stock appreciation rights ("SARs") and shares of Restricted Common
Stock may be granted or issued.
Qualified Options granted to Eligible Employees (as defined in the
Plan) will be exercisable at a price equal to the fair market value of the
shares at the time the Qualified Option is granted, or, if no such market
value is determinable, at the current net asset value of such shares, except
for options granted to any employee who owns 10% or more of the outstanding
F-15
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
stock of the Company ("10% shareholder"), for which the exercise price may
not be less than 110% of the current fair market value of the common stock.
If the aggregate fair market value (determined at the time the Qualified
Option is granted) of the shares exercisable for the first time by any
grantee during any calendar year exceeds $100,000, such excess shares may
not be treated as a Qualified Option. No Qualified Option may be exercised
more than 10 years after the date on which it is granted. In the case of an
option granted to a 10% shareholder, such period may not exceed five years.
Options not intended to qualify as qualified options may be granted
to Eligible Employees under the Plan and shall have such exercise prices and
such other terms and conditions as the Compensation Committee of the Company
(the "Committee") may determine in its discretion, subject to the
requirements of the 1940 Act.
The Plan is administered by the Board of Directors. The Board of
Directors determines who is eligible to participate in the Plan and the
number of shares, if any, on which options are to be granted, the SARs, if
any, to be granted with respect to such options and the shares of restricted
Common Stock, if any, to be issued, to eligible parties.
Options granted under the Plan will not be transferable, other than
by the laws of descent and distribution, and during the grantee's life may
be exercised only by such grantee. All rights to exercise options will
expire upon termination for cause of the holder's employment or
directorship.
The Plan also provides that shares of restricted Common Stock may
be granted to eligible employees on such terms and in such amounts as the
Committee determines. Such shares of Common Stock will be issued under a
written agreement, which will contain restrictions on transfers thereof as
may be required by law and as the Committee may determine in its discretion.
The Plan will terminate when there have been granted shares of
Common Stock and options on the total number of shares authorized by the
Plan or by action of the Board of Directors, but in no event later than June
12, 2005. The authorized number of shares may be increased, and the Plan's
date of termination may be extended, only by shareholder action.
Stock option activity for the past three years has been as follows:
2004 2003 2002
------------------------ ----------------------- -----------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Balance, 874,563 $ 1.19 874,563 $ 1.19 862,563 $ 1.17
beginning of
fiscal year
Granted -- -- 12,000 1.68
Exercised
Expired (8,000) 5.00 -- --
---------- ---------- ----------
Balance, end of
fiscal year 866,563 1.15 874,563 1.19 874,563 1.19
========== ========== ==========
Options
exercisable at
end of fiscal year 778,563 $ 1.14 778,563 $ 1.14 778,563 $ 1.14
========== ========== ==========
During the year 2002, the Board of Directors approved the extension
of the expiration date of 856,563 stock options for an additional number of
years up to the maximum ten years stipulated in the Plan. In accordance with
F-16
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
Financial Accounting Standard Board Interpretation Number 44, "Accounting
for Certain Transactions Involving Stock Compensation - An Interpretation of
APB Opinion Number 25", no compensation cost was incurred with the extension
as the exercise prices were higher than their fair value at the date of
modification.
The following table summarizes information about the stock options
outstanding as of March 31, 2004:
Options
Options Outstanding Exercisable
---------------------------------------------------------------- ------------------
Exercise price Number outstanding Weighted-average remaining contractual life Number exercisable
-------------- ------------------ ------------------------------------------- ------------------
$ 1.11 464,277 3.99 404,277
$ 1.16 366,286 1.13 366,286
$ 1.50 4,000 3.14 4,000
$ 1.53 20,000 2.92 4,000
$ 1.68 12,000 2.70 --
-------- ---------
866,563 778,563
======== =========
8. Concentration of Credit and Market Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consisted of cash and cash equivalents and
short-term marketable securities of $5,473,063 and $7,850,432 at March 31,
2004 and 2003, respectively. Cash is invested with banks in amounts, which,
at times, exceed insurable limits. Short-term marketable securities are
invested in U.S. government obligations and certificates of deposits. As of
March 31, 2004, 93% of the Company's total investment value was held in six
notes and equity securities: Accent Optical Technologies, Inc., J.L. French
Automotive Castings, Inc., Comdial Corporation, Open Solutions, Inc. and
Petroleum Place, Inc. and Engenia Software, Inc.
As of March 31, 2003, 87% of the Company's total investment value
was held in seven notes and equity securities, Accent Optical Technologies,
Inc., Engenia Software, Inc., Evoke Software Corporation, Open Solutions,
Inc., Petroleum Place, Inc., Comdial Corporation, and J.L. French Automotive
Castings, Inc.
9. Earnings (Loss) Per Common Share:
Years Ended March 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net earnings (loss) available for common stock
equivalent shares deemed to have a dilutive effect $ 1,136,649 $ (5,994,571) $(14,367,075)
============ ============ ============
Per share net increase (decrease)
in shareholders' equity resulting from operations
Basic $ 0.21 $ (1.12) $ (2.69)
============ ============ ============
Diluted $ 0.21 $ (1.12) $ (2.69)
============ ============ ============
Shares used in computation:
Basic
Weighted average common shares 5,346,084 5,346,084 5,346,084
============ ============ ============
Diluted
Weighted average common shares 5,346,084 5,346,084 5,346,084
============ ============ ============
Common stock equivalents -A- -A- -A-
------------ ------------ ------------
5,346,084 5,346,084 5,346,084
============ ============ ============
(A) For the years ended March 31, 2004, 2003 and 2002, the effect of
exercising the outstanding stock options would have been anti-dilutive
and, therefore, the use of common stock equivalent shares was not
considered.
F-17
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
10. Nasdaq Stock Market, Inc. ("Nasdaq") Letters and Delisting:
On June 17, 2002, the Company received notice from the Nasdaq Stock
Market, Inc. ("Nasdaq") that for the preceding 30 consecutive trading days,
the Company's stock had not maintained the minimum Market Value of Publicly
Held Shares of $5,000,000 as required for continued inclusion by Marketplace
Rule 4450(a)(2)(the "Rule") on the Nasdaq National Market.
On July 23, 2002, the Company received notice from Nasdaq that for
the preceding 10 consecutive trading days, the Company's common stock had
not maintained the minimum $1.00 per share as required for continued
inclusion by Marketplace Rule 4450(a)(5)(the 'Rule') on the Nasdaq National
Market.
On September 25, 2002, the Company was notified that the staff of
the Nasdaq Listing Qualifications Department had approved the Company's
application to transfer the listing of its common stock $0.01 par value,
from the Nasdaq National Market to the Nasdaq SmallCap Market.
On January 22, 2003, the Company received a determination of the
staff (the "Staff Determination") of the Nasdaq Listing Qualifications
Department (the "Staff") indicating that the Company failed to comply with
the minimum bid price of its common stock requirement for continued listing
set forth in Marketplace Rule 4450(a)(5) and that its securities were,
therefore, subject to delisting from the Nasdaq SmallCap Market effective
January 31, 2003. The Company was granted a hearing on March 6, 2003 before
a Nasdaq Listing Qualification Panel (the "Panel") to review the Staff
Determination. This hearing stayed the delisting of the Company's common
stock pending the Panel's decision.
On April 11, 2003, effective April 15, 2003, the Company received
notice from Nasdaq that the Company's securities were delisted from the
Nasdaq SmallCap Market. The Company's securities are quoted on the OTC
Bulletin Board effective April 15, 2003 with the assigned symbol "WCAP".
F-18
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 2004
Loans and Notes Receivable
Loan
Maturity Interest Fair % of Net
Company Name Industry Date Rate (%) Cost Value Assets
- ------------------ ------------ -------- --------- ----------- ----------- -----------
Loans
D&S Diner Rte 7 Restaurant 16-Oct-00 16.25 $ 24,049 $ -- 0.0%
Cobleskill Diner
Corp. (a) (b)
H. Lockings Corp.
(a) (b) Food Service 19-Jul-95 16.25 25,976 25,976 1.0%
Horizon Medical Medical
Products, Inc. Devices 16-Jul-05 8.00 246,250 246,250 9.4%
HPA Monon Corp. Trailer
(a) (c) Manufacturer 15-Mar-02 12.00 2,000,000 -- 0.0%
Phone Management Communication 18-Sep-01 None 61,655 -- 0.0%
Enterprises Inc. (a)
Comdial Corporation Communication 27-Mar-06 12.00 1,973,503 1,973,503 75.1%
J.L. French
Automotive Automotive 31-Dec-07 19.00 5,937,802 5,937,802 226.0%
Castings, Inc.
Engenia Software, Software
Inc. Design 31-Dec-04 8.00 245,658 245,658 9.3%
Notes Receivable
John Papakonstantis Restaurant 17-Jul-17 10.00 54,636 54,636 2.1%
----------- ----------- -----------
Total Loans and Notes Receivable $10,569,529 $ 8,483,825 322.9%
=========== =========== ===========
- ---------------------------
(a) Non-income producing or past due as to required principal and/or interest.
(b) Foreclosed upon
(c) Declared Chapter 7 bankruptcy
F-19
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2003
Loans and Notes Receivable
Loan
Maturity Interest Fair % of Net
Company Name Industry Date Rate (%) Cost Value Assets
- ------------------ ------------ -------- --------- ----------- ----------- -----------
Loans
D&S Diner Rte 7 Restaurant 16-Oct-00 16.25 $ 24,049 $ -- 0.0%
Cobleskill Diner
Corp. (a) (b)
H. Lockings Corp. Food Service 19-Jul-95 16.25 21,450 21,450 1.4%
Horizon Medical Medical
Products, Inc. Devices 16-Jul-05 6.00 246,875 246,875 16.6%
HPA Monon Corp. Trailer
(a) (c) Manufacturer 15-Mar-02 12.00 2,000,000 -- 0.0%
No-Name Deli/ Food Service 01-Aug-93 16.50 131,747 161,746 10.8%
Grocery, Inc. (a)(b)
Phone Management Communication 18-Sep-01 None 61,655 -- 0.0%
Enterprises Inc. (a)
Comdial Corporation Communication 27-Sep-05 12.00 1,955,835 1,955,835 131.2%
J.L. French
Automotive Automotive 31-Dec-07 19.00 5,532,614 5,532,614 371.0%
Castings, Inc.
Engenia Software, Software 31-Dec-04 8.00 90,753 90,753 6.1%
Inc. Design
Notes Receivable
Gabriel Lamana Real Estate 01-Mar-04 11.50 20,023 20,023 1.3%
957 South Elmora Real Estate 01-Dec-04 6.68 85,678 85,678 5.7%
Inc. (a)
John Papakonstantis Restaurant 17-Jul-17 10.00 56,547 56,547 3.8%
Vassar Development Real Estate 07-Apr-03 10.00 138,135 200,000 13.4%
Corp. ----------- ----------- -----------
Total Loans and Notes Receivable $10,365,361 $ 8,371,521 561.3%
=========== =========== ===========
- ---------------------------
(a) Non-income producing or past due as to required principal and/or interest.
(b) Foreclosed upon
(c) Declared Chapter 7 bankruptcy
F-20
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2004
Equity Interests
Cost or
Contributed Fair % of Net
Company Name Industry No. of Shares Value Value Assets
- -------------- -------------- --------------- ------------ ----------- ----------
Accent Optical Optoelectronics 585,366 Shares, $ 1,200,000 $ 600,000 22.8%
Technologies, Unregistered
Inc. Series A Preferred
Stock
Bigfoot E-Marketing 177,815 Shares, 518,364 185,369 7.1%
Interactive, Inc. Services Unregistered
Series B Preferred
Stock
127,901 Shares,
Unregistered
Series C Preferred
Stock
Comdial Communication 352,000 Shares, 103,680 421,144 16.0%
Corporation (a) Common Stock
Commerce One, Enterprise 25,401 Shares, 295,359 40,896 1.6%
Inc. (a) Procurement Common Stock
Software 33,112 Shares, 499,998 53,310 2.0%
Common Stock
Creative Foods, Specialty Warrant to Purchase -- 2,370 0.1%
Inc. (a) Baking Common Stock
divine, inc. (b) Collaboration, 12,342 Shares, 500,000 -- 0.0%
Interaction & Common Stock
Knowledge 3,918 Shares, 1,274,422 -- 0.0%
Solutions Common Stock
Engenia Collaborative 418,680 Shares, 2,600,002 700,002 26.6%
Software, Inc. Services Unregistered Series
Software C Preferred Stock
etang.com, Inc. Internet 11,306 Shares, 412,504 -- 0.0%
Service Unregistered Common
Provider Stock
Evoke Software Data 1,219,512 Shares, 2,500,000 120,000 4.6%
Corporation Management Unregistered Series
Software E Preferred Stock
2,151,470 Shares, 47,840 47,840 1.8%
Unregistered Series
AA Preferred Stock
6,454,409 Shares, 59,087 59,087 2.2%
Unregistered Series
AA Preferred Stock
Homepoint Home 10,875 Shares, 682,852 105,000 4.0%
Corporation Furnishings Unregistered Series B
Management Preferred Stock
Software
- ---------------------------------
(a) Publicly traded at March 31, 2004
(b) Delisted at March 31, 2004
F-21
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2004
Equity Interests
Cost or
Contributed Fair % of Net
Company Name Industry No. of Shares Value Value Assets
- -------------- -------------- --------------- ------------ ----------- ----------
InfoSpace.com, Internet 4,011 Shares, $ 400,129 $ 155,908 5.9%
Inc. (a) Infrastructure Common Stock
Services 501 Shares, 50,000 19,474 0.7%
Common Stock
Independence Brewing 949,941 Shares, 4,755 -- 0.0%
Brewing Co. (b) Common Stock
J. L. French Automotive 227,869 Warrants to 2,800 2,800 0.1%
Automotive Purchase Common
Castings, Inc. Stock
MarketFirst E-Marketing 938,881 Shares, 999,908 -- 0.0%
Software, Inc. Solutions Unregistered Series
D Preferred Stock
myGeek.com, Inc. On-Line Personal 287,969 Shares, 1,000,000 100,000 3.8%
Shopper Unregistered Series
A Preferred Stock
NeoPlanet, Inc. Branding 62,448 Shares, 750,000 19,689 0.8%
Solutions Unregistered Series
B Preferred Stock
Open Solutions, Electronic 240,582 Shares, 2,044,949 5,309,645 202.1%
Inc. (a) Commerce Banking Common Stock
& Enterprise
Processing
Applications
Petroleum Place, Energy Internet 25,372 Shares, 1,499,992 1,799,992 68.5%
Inc. Marketplace and Unregistered Series
Portal C Preferred Stock
Primedia, Inc. (a) Special Interest 27,667 Shares, 500,000 74,701 2.8%
Magazine Publisher Common Stock
Streaming Media Rich Media 586,667 Shares, 2,200,000 -- 0.0%
Corporation Delivery Unregistered Series
A Preferred Stock
U.S. Wireless Internet-based 83,333 Shares, 500,000 -- 0.0%
Data, Inc. (a) Wireless Common Stock ------------ ----------- ----------
Transaction
Processing
Total Equity Interests $ 20,646,641 $ 9,817,227 373.5%
============ =========== ==========
- ---------------------------------
(a) Publicly traded at March 31, 2004
(b) Delisted at March 31, 2004
F-22
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2003
Equity Interests
Cost or
Contributed Fair % of Net
Company Name Industry No. of Shares Value Value Assets
- -------------- -------------- --------------- ------------ ----------- ----------
Accent Optical Optoelectronics 585,366 Shares, $ 1,200,000 $ 1,200,000 80.5%
Technologies, Unregistered
Inc. Series A Preferred
Stock
Bigfoot E-Marketing 177,815 Shares, 518,364 185,369 12.4%
Interactive, Inc. Services Unregistered
Series B Preferred
Stock
127,901 Shares,
Unregistered
Series C Preferred
Stock
Comdial Communication 352,000 Shares, 103,680 75,429 5.1%
Corporation (a) Common Stock
Commerce One, Enterprise 25,401 Shares, 295,359 42,420 2.8%
Inc. (a) Procurement Common Stock
Software 33,112 Shares, 499,998 55,297 3.7%
Common Stock
Creative Foods, Specialty Warrant to Purchase -- 886 0.1%
Inc. (a) Baking Common Stock
divine, inc. (b) Collaboration, 12,342 Shares, 500,000 -- 0.0%
Interaction & Common Stock
Knowledge 3,918 Shares, 1,274,422 -- 0.0%
Solutions Common Stock
Engenia Collaborative 418,680 Shares, 2,600,002 1,300,002 87.2%
Software, Inc. Services Unregistered Series
Software C Preferred Stock
etang.com, Inc. Internet 11,306 Shares, 412,504 -- 0.0%
Service Unregistered Common
Provider Stock
Evoke Software Data 1,219,512 Shares, 2,500,000 1,250,000 83.8%
Corporation Management Unregistered Series
Software E Preferred Stock
2,151,470 Shares, 47,840 47,840 3.2%
Unregistered Series
AA Preferred Stock
6,454,409 Shares, 59,087 59,087 4.0%
Unregistered Series
AA Preferred Stock
Hewlett-Packard Computer 27,818 Shares, 491,882 432,570 29.0%
Company (a) Hardware & Common Stock
Storage
- ---------------------------------
(a) Publicly traded at March 31, 2003
(b) Delisted at March 31, 2003
F-23
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2003
Equity Interests
Cost or
Contributed Fair % of Net
Company Name Industry No. of Shares Value Value Assets
- -------------- -------------- --------------- ------------ ----------- ----------
Homepoint Home 10,875 Shares, $ 682,852 $ 105,000 7.0%
Corporation Furnishings Unregistered Series
Management B Preferred Stock
Software
Horizon Medical Medical Devices 312,500 Shares, 3,125 41,625 2.8%
Products, Inc. (a) Common Stock
InfoSpace.com, Internet 4,011 Shares, 400,129 43,439 2.9%
Inc. (a) Infrastructure Common Stock
Services 501 Shares, 50,000 5,426 0.4%
Common Stock
Independence Brewing 949,941 Shares, 4,755 -- 0.0%
Brewing Co. (b) Common Stock
J. L. French Automotive 227,869 Warrants to 2,800 2,800 0.0%
Automotive Purchase Common
Castings, Inc. Stock
MarketFirst E-Marketing 938,881 Shares, 999,908 -- 0.2%
Software, Inc. Solutions Unregistered Series
D Preferred Stock
myGeek.com, Inc. On-Line Personal 287,969 Shares, 1,000,000 100,000 6.7%
Shopper Unregistered Series
A Preferred Stock
NeoPlanet, Inc. Branding 62,448 Shares, 750,000 19,689 1.3%
Solutions Unregistered Series
B Preferred Stock
Open Solutions, Electronic 281,116 Shares, 2,620,000 3,490,000 234.1%
Inc. (a) Commerce Banking Unregistered Series
& Enterprise F Preferred Stock
Processing
Applications
Petroleum Place, Energy Internet 25,372 Shares, 1,499,992 1,499,992 100.6%
Inc. Marketplace and Unregistered Series
Portal C Preferred Stock
Pinnacor Inc. (a) Digital Content 133,333 Shares, 470,400 138,266 9.3%
Network Common Stock
31,849 Shares, 185,043 38,856 2.6%
Common Stock
Primedia, Inc. (a) Special Interest 27,667 Shares, 500,000 67,784 4.5%
Magazine Publisher Common Stock
Streaming Media Rich Media 586,667 Shares, 2,200,000 -- 0.0%
Corporation Delivery Unregistered Series
A Preferred Stock
F-24
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2003
Equity Interests
Cost or
Contributed Fair % of Net
Company Name Industry No. of Shares Value Value Assets
- -------------- -------------- --------------- ------------ ----------- ----------
U.S. Wireless Internet-based 83,333 Shares, $ 500,000 18,332 1.2%
Data, Inc. (a) Wireless Common Stock
Transaction
Processing ------------ ----------- ----------
Total Equity Interests $ 22,372,142 $10,220,109 685.4%
============ =========== ==========
- ---------------------------------
(a) Publicly traded at March 31, 2003
(b) Delisted at March 31, 2003
F-25
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2003
Assets Acquired in Liquidation
March 31, 2003
--------------------------------------------
Fair % of Net
Cost Value Assets
------------ ------------ ------------
Company Name
- ------------
Suburban Enterprises, Inc. $ 24,707 $ -- 0.0%
------------ ------------ ------------
Total Assets Acquired in Liquidation $ 24,707 $ -- 0.0%
============ ============ ============
F-26